The Central Board of Direct Taxes, in the Income-tax (Second Amendment) Rules, 2025, brings about important amendments to the Income-tax Rules, 1962. The rules are meant to strengthen the regulatory framework for venture capital funds and finance companies that operate in IFSCs. These changes will align with the financial landscape's shift and give more clarity to tax incentives available for such entities.

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Introduction to the Amendments

The Income-tax (Second Amendment) Rules, 2025 published on January 27, 2025, intend to standardize and streamline the activities of VCFs and Finance Companies in the IFSCs. The provisions made with specific conditions and activities for the entities will be able to create an environment that is welcoming for investment and financing services for India. This would become especially crucial for India while it aims to turn itself into one global hub for finance and investments.

Key Provisions of the Amendment

• Conditions for Venture Capital Funds: One of the major additions is Rule 2DAA which deals with particular conditions related to venture capital funds under section 10 of clause (23FB). In particular, this rule categorizes that any venture capital fund shall fall within the bracket of Category I Alternative Investment Fund that falls within the category regulated by the International Financial Services Centres Authority (Fund Management) Regulations, 2022. Therefore, classification under this category is essential, as these funds can take advantage of some specific tax exemptions granted by section 10 in respect of investing in start-ups and innovative enterprises.
• Definition of Finance Companies in IFSCs: The amendment introduces Rule 21ACA which provides the list of activities permissible to be undertaken by Finance Companies in IFSCs. The permissible activities are:

1. Loaning in several forms such as loans, commitment, guarantees, credit enhancement, securitization, and finance leases.
2. Factoring and forfaiting of receivables.
3. Functions related to Global or Regional Corporate Treasury Centres, including borrowings, lending, hedging of currency or commodity risk, cash management, structured credit, intra-group financing, and financial budgeting.

• Foreign Currency Requirement: Under Rule 21ACA, all interest paid by a Finance Company on debt issued by a non-resident has to be in foreign currency. The objective is to facilitate smooth cross-border transactions and to eliminate the risk of currency for lenders and borrowers alike.
• Retail schemes and exchange-traded Funds ETFs: The amendment provides for retail schemes under Rule 21AIA. It is provided that for a retail scheme, there need to be at least twenty investors, and any one investor not more than twenty-five per cent of the total investment made. Investments are also capped into associates and in unlisted securities to avoid high concentration and reduce the risk.
• Exchange Traded Funds (ETFs): In the case of ETFs, they must be traded on recognized stock exchanges and follow regulations that have been stipulated by the International Financial Services Centres Authority. This provision will help maintain the transparency and liquidity of operations involved in an ETF.
• Clarification of Terms: It is defined by the term "Finance Company," "International Financial Services Centre," "associate," "fund management entity," and "specified fund." Definitions help remove vagueness, hence giving a more precise understanding of what regulatory expectations are from the stakeholders. 

Implications for Investors and Businesses

The Income-tax (Second Amendment) Rules, 2025, brings in several implications for the financial sector's stakeholders.

• Increased Regulatory Clarity: The amendments of these rules would define the role and responsibility of VCFs and Finance Companies in IFSCs. In this way, it would help to bring regulatory clarity, which is much required for attracting investments from both the domestic and international markets into the Indian financial market.
• Alternative Investment Fund: VCFs are classified as Category I AIFs. This promotes investments in start-ups and innovative business ventures. India aims to support entrepreneurship and spur economic growth through innovation. And usher in economic growth through innovation.
• Facilitating Cross-Border Transactions: The provision that interest payments on debts issued by non-residents should be made in foreign currency will make cross-border transactions easier. This provision is likely to attract more foreign investment into Indian financial markets.
• Risk Mitigation through Diversification: Investment in associates and unlisted securities are restricted, helping to reduce risks associated with a concentrated investable universe. Such rules promote diversification, protecting investors' interests while helping funds sustain growth.

Also Read: Income Tax Slabs FY 2023-24 & 2024-25 (New Old Regime Tax Rates)

Conclusion

Income-tax (Second Amendment) Rules, 2025 are a major step forward in the financial regulatory architecture of India. Clear guidelines for Venture Capital Funds and Finance Companies operating out of International Financial Services Centres attract investment and growth. As India aspires to establish itself as an international financial hub, such regulatory reformation is quite essential to the building of confidence among investors and sustainable economic growth. Moreover, these changes are in line with broader economic interests in India and also show a commitment to creating a robust ecosystem that supports innovation and entrepreneurship. The stakeholders must remain updated about these changes for new opportunities and ensure that they comply with the changed regulatory requirements.