Direct Tax Laws and International Taxation · GAAR

GAAR Exclusions, Grandfathering and Treaty Interaction

Updated 11 October 2026 · Fact-checked

GAAR does not apply to every arrangement. It is excluded where the total tax benefit is within the ₹3 crore threshold, for FPIs not taking treaty benefit, for their offshore derivative investors, and for income from transfer of investments made before 1 April 2017. Check the exclusions first, then check SAAR and treaty overlap.

Understand GAAR Exclusions, Grandfathering and Interaction with Treaties

GAAR is the General Anti-Avoidance Rule. It lets the tax authority deny a tax benefit from an impermissible avoidance arrangement. Because it is a strong power, the law carves out cases where it should not be used. Most exam questions test these carve-outs.

The main exclusions are these. First, an arrangement where the tax benefit in the year, added up for all parties to the arrangement, does not exceed ₹3 crore. Second, a Foreign Portfolio Investor (FPI) that does not take the benefit of a tax treaty, and invests in listed securities, or securities to be listed, as per SEBI rules. Third, a non-resident investor in such an FPI, by way of offshore derivative instruments or otherwise. Fourth, income from the transfer of investments made before 1 April 2017. This fourth rule is called grandfathering.

Grandfathering is narrow. It protects the income from transfer of the old investment. It does not protect a new arrangement made after 1 April 2017, even if it relates to an old investment. GAAR can apply to a tax benefit arising on or after 1 April 2017 from an earlier arrangement.

GAAR vs SAAR. A SAAR (Specific Anti-Avoidance Rule) targets one defined situation, such as transfer pricing or a limitation of benefits clause in a treaty. GAAR is a general backstop that looks at substance. Official clarifications say that where a SAAR, such as a treaty limitation of benefits clause, adequately deals with the avoidance, GAAR should not be invoked for the same thing. GAAR is not applied merely because a structure uses a low-tax jurisdiction.

GAAR and treaties. GAAR can be applied even to deny a treaty benefit. A treaty does not shield an arrangement that is an impermissible avoidance arrangement. A treaty claim is also the reason an FPI loses its exclusion. The FPI exclusion depends on not taking treaty benefit.

Note: the Income-tax Act, 2025 text supplied with this brief does not cover GAAR, so no section numbers are quoted here. Learn the rules by their conditions.

Key rules to remember

Monetary threshold: Aggregate tax benefit of all parties in the year ≤ ₹3,00,00,000 → GAAR not applicable; Add the benefit for all parties. If it exceeds ₹3 crore, this exclusion fails. Exactly ₹3 crore is within the exclusion.
FPI exclusion: FPI + no treaty benefit claimed + investment as per SEBI rules → GAAR not applicable; If the FPI claims treaty benefit, the exclusion is lost.
Offshore derivative investor: Non-resident investing in such an FPI (directly or indirectly, including through offshore derivative instruments) → GAAR not applicable; It follows the FPI exclusion.
Grandfathering: Income from transfer of investments made before 1 April 2017 → GAAR not applicable; Applies to the transfer income of the old investment only. It does not cover new arrangements.
SAAR overlap: SAAR adequately addresses the avoidance → GAAR not invoked for it; This follows official clarification. It is not an automatic bar.

How to solve GAAR Exclusions, Grandfathering and Interaction with Treaties questions

Use this order for any question asking whether GAAR applies to a given arrangement.

1List the facts: who the parties are, the date of investment, the year of the tax benefit, and whether a treaty is claimed.
2Compute the tax benefit for each party and add them up for the year.
3If the total is ₹3 crore or less, state that GAAR does not apply and stop.
4Check the FPI and offshore derivative exclusions. Confirm that no treaty benefit is taken.
5Check grandfathering: was the investment made before 1 April 2017, and is the income from its transfer?
6Check whether a SAAR or a treaty limitation of benefits clause already covers the avoidance.
7If no exclusion applies, test whether it is an impermissible avoidance arrangement and name the consequence.
8Write a clear conclusion with reasons.

Quickest way: Exclusion checklist: T-F-G-S

When to use it: Use it for MCQs and short case questions where you must decide quickly whether GAAR applies.

Threshold: is the total benefit more than ₹3 crore? If not, no GAAR.
FPI: no treaty benefit and SEBI-compliant? If yes, no GAAR.
Grandfathering: transfer income from an investment made before 1 April 2017? If yes, no GAAR.
SAAR or treaty LOB: is the avoidance already covered? If yes, GAAR is normally not invoked.
If all four fail, move on to the impermissible avoidance arrangement test.

Common mistakes in GAAR Exclusions, Grandfathering and Interaction with Treaties

Treating grandfathering as protection for any arrangement connected with an old investment.
Students read 'before April 2017' and stop there.
Fix: Grandfathering covers income from the transfer of investments made before 1 April 2017. A new arrangement after that date can still face GAAR.
Testing the ₹3 crore limit for each party separately.
Students think of each taxpayer in isolation.
Fix: Add the tax benefit of all parties to the arrangement for the year, then compare with ₹3 crore.
Saying the threshold applies when the benefit is exactly ₹3 crore is exceeded.
Confusion between 'exceeds' and 'equals'.
Fix: GAAR is excluded when the benefit does not exceed ₹3 crore. It applies only when it is more.
Giving the FPI exclusion to an FPI that claims a treaty benefit.
Students remember 'FPI' but forget the condition.
Fix: State both parts: the FPI does not take treaty benefit, and invests as per SEBI rules.
Saying a treaty always protects against GAAR.
Students confuse treaty override of domestic law with anti-abuse rules.
Fix: GAAR can be used to deny a treaty benefit. In practice, if a treaty LOB clause already deals with the abuse, GAAR is not invoked.
Quoting section numbers of the supplied provisions for GAAR answers.
Students try to cite a number for every point.
Fix: Give the rule and its conditions. Cite a section only if you are certain of it.

Worked examples

Example 1

Two related companies, Asha Textiles Ltd and Bharat Fabrics Ltd, enter into an arrangement. Tax benefit for the year is ₹1,90,00,000 for Asha and ₹1,40,00,000 for Bharat. Can the exclusion for the ₹3 crore threshold be claimed?

Show the solution

Add the benefit of all parties: ₹1,90,00,000 + ₹1,40,00,000 = ₹3,30,00,000.
Compare with the threshold: ₹3,30,00,000 is more than ₹3,00,00,000.
Each party is individually below ₹3 crore, but the test is on the aggregate.
So the threshold exclusion is not available.

Answer: The exclusion fails. The aggregate benefit is ₹3,30,00,000, which exceeds ₹3 crore. Other exclusions must be checked, and GAAR may apply if none is available.

Example 2

A Singapore company bought shares of an Indian unlisted company in March 2016 and sold them in 2027. Another Singapore company bought the same kind of shares in June 2018 through a new holding structure and sold them in 2027. Both claim GAAR cannot apply. Advise.

Show the solution

First company: the investment was made before 1 April 2017, and the income is from its transfer.
So this income falls under grandfathering and GAAR does not apply to it.
Second company: the investment was made after 1 April 2017, so grandfathering is not available.
Check the other exclusions: no FPI status is stated and the threshold is not given, so these cannot be assumed.
If the tax benefit exceeds ₹3 crore and no SAAR or treaty limitation of benefits clause covers it, GAAR can be tested on the new structure.

Answer: The first company is protected by grandfathering. The second is not. GAAR can apply to its structure if no other exclusion applies and the arrangement is an impermissible avoidance arrangement.

Exam tips

In an MCQ, look for the trap words: 'before 1 April 2017', 'exceeds ₹3 crore', 'no treaty benefit'.
In a case question, always compute the aggregate benefit before writing any conclusion.
Write SAAR and GAAR as a short comparison: SAAR is specific and rule-based; GAAR is general and looks at substance.
Say clearly that GAAR can deny treaty benefit, but is normally not invoked where a treaty LOB clause already covers the abuse.
Do not quote section numbers unless you are certain; the conditions earn the marks.

Practice questions from GAAR

GAAR Exclusions, Grandfathering and Interaction with Treaties: frequently asked questions

When is GAAR not applicable?

GAAR is not applicable where the aggregate tax benefit in the year does not exceed ₹3 crore. It is also excluded for FPIs that do not take treaty benefit, for non-resident investors in such FPIs, and for income from transfer of investments made before 1 April 2017.

What is the GAAR grandfathering rule?

Income from the transfer of investments made before 1 April 2017 is outside GAAR. It protects the old investment's transfer income. It does not protect new arrangements made later.

What is the difference between GAAR and SAAR?

SAAR deals with a specific situation, such as transfer pricing or a treaty LOB clause. GAAR is a general rule that examines the substance of an arrangement. Where a SAAR adequately addresses the avoidance, GAAR is normally not invoked for it.

Can GAAR override a tax treaty?

GAAR can be applied to deny a treaty benefit if the arrangement is an impermissible avoidance arrangement. However, if a treaty limitation of benefits clause adequately handles the abuse, GAAR is not generally invoked.