PAN Exemption for Non-Resident Fund Investors: CBDT’s 2026 Rule 157 Amendment Explained

India’s new Income-tax Act, 2025 and Income-tax Rules, 2026 have carried forward a targeted relaxation from the earlier regime: certain non-resident investors can be exempt from obtaining a Permanent Account Number where their Indian nexus is limited to qualifying investments and the prescribed information-reporting conditions are satisfied. CBDT’s Income-tax (Second Amendment) Rules, 2026, notified on 21 July 2026, materially clarify which funds can sit inside that framework.

What changed on 21 July 2026

Notification No. 94/2026, G.S.R. 646(E), substitutes clause (c) of Rule 157(5) of the Income-tax Rules, 2026. The revised definition of “specified fund” now expressly covers a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate that is registered as a Category I or Category II Alternative Investment Fund and is regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012, or under the IFSCA (Fund Management) Regulations, 2022 where the fund is located in an International Financial Services Centre. It also includes a fund referred to in Schedule VI, Note 1(g), of the Income-tax Act, 2025.

The amendment took effect on publication in the Official Gazette. Its significance is not merely definitional: Rule 157 is the rule governing persons exempt from obtaining PAN under section 262, so the scope of “specified fund” directly affects whether the non-resident investor exemption can be accessed in the first place.

How the PAN-exemption framework works

Rule 157 provides a conditional exemption from section 262 for a non-resident individual or other non-corporate non-resident who invests in a specified fund during the tax year. The relief is not a blanket exemption for every foreign investor. It operates only where the statutory and rule-based conditions are met, including the prescribed limitations on Indian-source exposure, withholding and information furnished by the investor and the fund.

The Income Tax Department’s 2026 forms guidance identifies Form 49BA as the quarterly statement to be furnished by a specified fund or stock broker in respect of a non-resident covered by Rule 157. That reporting obligation is central to the design of the exemption: ease of onboarding for qualifying non-residents is exchanged for structured reporting by regulated intermediaries.

Why the amended definition matters for AIFs and IFSC structures

The revised language removes avoidable uncertainty during India’s transition from the 1961 Act to the 2025 Act. Category I and Category II AIFs regulated by SEBI are expressly recognised, while qualifying IFSCA-regulated funds in an IFSC are also covered. For fund managers, administrators, custodians and tax advisers, this means eligibility testing should now begin with the fund’s legal form, registration category, regulator and location, rather than with a generic assumption that every alternative fund qualifies.

The distinction is especially important for structures with multiple schemes, feeder vehicles or offshore investors. A fund may be commercially part of the same platform while not necessarily satisfying the same statutory definition. Investor onboarding teams should therefore document the precise entity and registration through which the investment is made.

The compliance controls professionals should implement

First, create a formal Rule 157 eligibility file for every fund relying on the PAN exemption. The file should capture the constitutive form of the fund, SEBI or IFSCA registration, AIF category, IFSC location where relevant, and the statutory basis for treating it as a specified fund.

Second, build investor-level controls rather than relying only on fund-level eligibility. A qualifying fund does not automatically make every investor eligible. The non-resident’s income profile, transaction path, withholding position and prescribed declarations must be reviewed independently.

Third, reconcile onboarding data with quarterly Form 49BA reporting. Investor name, jurisdiction, tax-identification data, transaction records and status should be consistent across KYC systems, registrar or administrator records and the tax filing. Mismatches can convert a facilitative exemption into a compliance problem.

Fourth, preserve documentary evidence of foreign residence and the declarations obtained from the investor for the period relevant to the exemption. Fund administrators should treat this as tax evidence, not merely as KYC documentation.

Fifth, review whether legacy operating procedures still cite Rule 114AAB of the Income-tax Rules, 1962. The 2026 framework is now anchored in section 262 of the Income-tax Act, 2025 and Rule 157 of the Income-tax Rules, 2026. Policies, investor communications, tax checklists and compliance manuals should use the new references for transactions from 1 April 2026 onward.

What tax teams should not assume

The Rule 157 relief is a PAN-compliance exemption, not a general tax exemption. It does not, by itself, determine whether a particular item of income is taxable in India, whether a treaty benefit is available, whether withholding is required, or whether another filing obligation applies. Those questions must be tested separately under the Income-tax Act, 2025, the applicable Schedule provisions, the relevant tax treaty and any other reporting rules.

Practical takeaway

CBDT’s 21 July 2026 amendment is a small textual change with meaningful operational consequences. For Category I/II AIFs and IFSC fund structures, the correct response is to embed the amended “specified fund” definition into investor onboarding, PAN-exemption testing, withholding workflows and Form 49BA reporting. The strongest control is a documented eligibility matrix that links each investor to the precise fund entity, regulatory status and evidence supporting the exemption.

Disclaimer

This article is for general professional information and does not constitute legal, tax or investment advice. Eligibility for a PAN exemption and the tax treatment of a particular investor or fund structure should be evaluated on its specific facts and the law in force at the relevant time.