Rules 127 and 128 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 127 narrows the consequences of an impermissible avoidance arrangement to the part declared impermissible. Rule 128 lists the cases in which the general anti-avoidance rule in Chapter XI of the Income-tax Act, 2025 does not apply at all. Notification 55/2026 replaced rule 128(1)(d) and rule 128(2) with effect from 1 April 2026.
This article is written as per the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026. Later notifications should be checked before you act.
Under rule 127, where only a part of an arrangement is declared an impermissible avoidance arrangement, the tax consequences are determined with reference to that part only. Under rule 128, Chapter XI does not apply to an arrangement whose aggregate tax benefit in the relevant tax year, to all parties, does not exceed three crore rupees, to certain Foreign Institutional Investors and their offshore investors, and, by sub-rule (1)(d) as substituted by the Income-tax (Amendment) Rules, 2026 (G.S.R. 241(E), 31 March 2026, in force 1 April 2026), to income from transfer of such investments as were made before 1 April 2017.
Groups with cross-border structures can review them with our tax planning advisory team against these exclusions.
What changed after March 2026
Notification 55/2026 is made under section 533 read with section 183 of the Income-tax Act, 2025. It came into force on the 1st April, 2026, and its rule 2 substitutes rule 128(1)(d) and rule 128(2).
| Provision | As notified in March 2026 | After the amendment |
|---|---|---|
| Rule 128(1)(d) | "any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of investments made before the 1st April, 2017 by such person" | "any income accruing or arising to, or deemed to accrue or arise to, or received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by such person" |
| Rule 128(2) | "Without prejudice to the provisions of sub-rule (1)(d), the provisions of Chapter XI shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017." | "The provisions of Chapter XI shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 1st April, 2017, except for that income which accrues or arises to, or deemed to accrue or arise to, or is received or deemed to be received by, any person from transfer of such investments which were made before the 1st April, 2017 by such person." |
The two changes work together: sub-rule (1)(d) now speaks of "such investments", and sub-rule (2) carries the same exception inside it, instead of opening with "Without prejudice to" sub-rule (1)(d).
Rule 127: consequences confined to the impermissible part
Rule 127 is made for section 181. It says that where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to that part only. Our article on sections 181 to 183, consequences of an impermissible avoidance arrangement and application of Chapter XI explains the section.
Rule 128(1): the carve-outs
Chapter XI does not apply to:
| Clause | Case |
|---|---|
| (a) | An arrangement where the aggregate tax benefit in the relevant tax year to all parties does not exceed three crore rupees |
| (b) | A Foreign Institutional Investor who (i) is an assessee under the Act, (ii) has not taken the benefit of an agreement referred to in section 159, and (iii) has invested in listed or unlisted securities with the prior permission of the competent authority, in accordance with the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, in relation to such investments |
| (c) | A non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly, in a Foreign Institutional Investor |
| (d) | Income from transfer of such investments as were made before the 1st April, 2017 by such person (as amended) |
The 1995 Regulations are named in the rule; please check that law for its own terms. For the Foreign Institutional Investor and section 159 conditions, see our articles on section 210, tax on Foreign Institutional Investors and section 159, DTAA relief.
Rule 128(2): the date from which the benefit counts
Chapter XI applies to any arrangement, irrespective of the date on which it was entered into, in respect of the tax benefit obtained from it on or after the 1st April, 2017, except for the income from transfer of such investments as were made before the 1st April, 2017. So the date that matters for an old arrangement is the date of the benefit, not of the arrangement, and the pre-April 2017 investment income stays outside.
If you hold structures that pre-date 2017, or you are weighing whether a cross-border arrangement is exposed, our tax planning advisory team can review the facts against these exclusions.
Rule 128(3): definitions
For this rule, "Foreign Institutional Investor" has the meaning in section 210(6)(a); "offshore derivative instrument" the meaning in the 1995 Regulations; "Securities and Exchange Board of India" the meaning in section 2(1)(a) of the Securities and Exchange Board of India Act, 1992; and "tax benefit", as defined in section 184(11) and computed in accordance with Chapter XI, is:
- for section 184(11)(a) to (e), the amount of tax; and
- for section 184(11)(f), the tax that would have been chargeable had the increase in loss referred to there been the total income.
Our article on section 184, definitions for the general anti-avoidance rule explains "tax benefit".
Two examples
Kestrel Holdings Limited and Falcon Industries Private Limited enter into an arrangement whose aggregate tax benefit to all parties in the relevant tax year comes to three crore rupees exactly. Because it does not exceed three crore rupees, rule 128(1)(a) takes it out of Chapter XI.
Orbit Overseas, a non-resident, invested in an Indian company's shares before 1 April 2017 and sells those very shares later. Under rule 128(1)(d) as amended, the income from transfer of such investments is outside Chapter XI. If the arrangement also gave a tax benefit from other transactions on or after 1 April 2017, rule 128(2) keeps those within Chapter XI, except for the income from the pre-April 2017 investments.
Need help with an anti-avoidance question?
Whether Chapter XI can reach a structure is a fact-heavy question. For a conversation about your own facts, use our legal consultation service.
Key takeaways
- Rule 127 confines consequences to the part declared impermissible.
- Rule 128(1)(a): no GAAR where the aggregate tax benefit in the relevant tax year does not exceed three crore rupees.
- Rule 128(1)(d) and (2) were substituted by G.S.R. 241(E), in force 1 April 2026.
- The date test is the date of the tax benefit (on or after 1 April 2017), not the date of the arrangement.
Read next
- Rules 129 to 132: GAAR reference and the Approving Panel
- Section 274: reference to the Principal Commissioner
- Section 179: impermissible avoidance arrangement
- Sections 181 to 183: consequences and application of Chapter XI
- Section 184: definitions for the general anti-avoidance rule
Disclaimer: Based on the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026, as consulted on 2 October 2026. It explains the words of the rules and forms only; later notifications, the forms and utilities on the e-filing portal, circulars and the way the tax authorities apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.