The income tax department has announced relaxation of certain earlier conditions governing foreign fund managers in a bid to encourage them to move to India. On account of stringent norms most of them manage foreign capital to India out of Singapore, Dubai and London.

However the changed norms will facilitate minimum participation criterion in the funds, advance ruling mechanism and diversified nature of the funds.

Finance minister Arun Jaitley in his budget speech had made some income-tax exemptions to fund managers by amending the permanent establishment (PE) norms. The rules were tweaked such that the mere presence of a fund manager in India does not constitute PE of the offshore fund..Which meant fund managers getting exemption from corporate taxation in India.

However even these norms had certain clauses that deterred fund managers such as Citi, Morgan Stanley, JPMorgan and others, from moving to India. The conditions for availing the tax exemptions were rather stiff.

The new rules has provisions for a pre-approval mechanism based on which a fund can seek prior approval from the tax department and avail exemption under Section 9A of the Income Tax Act. This will provide the much-needed certainty to the offshore funds. The section deals with treatment of income deemed to accrue or arise in India, and is taxable in India.

As per the old norms a fund has to have at least 25 members at the foreign institutional investor level. Also earlier, funds-of-funds that invest through one entity could not be treated as just one investor. However now, after some tweaks by the Central Board of Direct Taxes (CBDT), the new rules elicit that the determination of number of members and the participation interest in the fund will be done by looking through the entity where the investment in the fund has been made directly by an institutional entity.

Under the existing norms, fund managers can be given only an arm's length remuneration or those prevalent in the markets. Further relaxing the conditions, rule now says that the eligibility of the fund would not be affected if this norm is met in two out of the previous four years.