Rule 2D of Income-tax Rules, 1962: Venture Capital Fund Approval under Section 10(23F)
Rule 2D of the Income-tax Rules, 1962 set out an approval procedure for venture capital funds and venture capital companies seeking exemption under the former section 10(23F) of the Income-tax Act, 1961. This guide explains the historical application process, supporting records, investment conditions and grounds for withdrawal, while distinguishing that framework from later venture capital taxation.
What was Rule 2D?
Rule 2D prescribed how a venture capital fund or venture capital company applied for approval for the purposes of section 10(23F). The historical provision addressed specified dividend income and long-term capital gains arising from investments by way of equity shares in qualifying venture capital undertakings. Eligibility was not automatic: the prescribed authority reviewed the application, SEBI registration, investment restrictions and audit compliance.
Prescribed authority and Form 56A
Under sub-rules (1) and (2), the prescribed authority was the Director of Income-tax (Exemptions) having jurisdiction over the applicant. The applicant used Form No. 56A to seek approval. Sub-rule (3) linked the timing of the application to a previous year in which qualifying dividend income or long-term capital gains were claimed to be excluded under the historical framework.
Documents required with the application
Sub-rule (4) required an applicant to submit the following documents:
- A copy of the trust deed or certificate of incorporation under the then-applicable company law.
- Balance sheets and profit and loss accounts for the three previous years immediately preceding the application year.
- Duly completed and signed Forms 56B and 56C.
- A copy of the registration certificate issued by the Securities and Exchange Board of India (SEBI).
References in the original rule to the Companies Act, 1956 and historical form procedures reflect the legislation in force when the provision operated. They should not be mistaken for current filing instructions.
Conditions for approval under sub-rule (5)
The historical approval regime imposed investment and compliance safeguards. Among the conditions reproduced in the source rule were:
- SEBI registration: The venture capital fund or company had to be registered with SEBI.
- Single-undertaking concentration: Investment in any one venture capital undertaking could not exceed 20% of total monies raised or paid-up share capital, as applicable, under the version reproduced in the original page.
- Equity concentration: Investment could not exceed 40% of the equity capital of any one venture capital undertaking.
- Books and audit: Proper books of account had to be maintained, audited by a qualified accountant and supported by an audit report furnished to the prescribed authority before the applicable income-tax return due date.
The original text shows clauses (b) and (c) as blank, reflecting historical amendments or omissions. No additional conditions are inferred from those blank clauses. For a dispute involving an earlier assessment year, consult the official version of the rule effective in that specific year.
Approval, refusal and opportunity to be heard
Sub-rule (6) required the Director of Income-tax (Exemptions) to issue a written order granting or refusing approval. Under the text reproduced on the original page, refusal required concurrence from the Director-General of Income-tax (Exemptions), and the applicant had to receive an opportunity of being heard before an adverse order.
When could approval be withdrawn?
Under sub-rule (7), the authority could withdraw approval for non-compliance, including:
- Investments contrary to the prescribed manner or exceeding the 20% single-undertaking investment ceiling.
- Investment exceeding 40% of the equity capital of a venture capital undertaking.
- Failure to maintain accounts, have them audited or furnish the required audit report.
- Violation of applicable income-tax provisions or rules.
- Suspension or cancellation of the applicant's SEBI registration.
How venture capital taxation differs today
Indian venture capital taxation has changed substantially since the section 10(23F) approval framework. Subsequent regimes included section 10(23FB) and pass-through rules for qualifying investment funds, including provisions historically found in sections 115UB and 10(23FBA). The applicable treatment depends on the fund's regulatory classification, income type, tax period and relevant transitional law.
For a current fund, the practical starting point is to verify its SEBI registration and category, identify the relevant tax year, and apply the legislation and rules then in force rather than relying on Form 56A or historical Rule 2D. See the Income Tax Department and SEBI for official legislative and regulatory material.
Frequently asked questions
What did Form 56A cover?
It was the application for approval by a venture capital fund or venture capital company under historical Rule 2D for the purposes of section 10(23F).
Did SEBI registration alone secure the exemption?
No. The historical rule also required approval from the prescribed income-tax authority and compliance with investment, accounting and audit conditions.
Can a venture capital fund apply under Rule 2D in 2026?
The procedure belongs to an earlier statutory framework and should not be used as a current application route. Current eligibility and compliance must be evaluated under the law applicable to the relevant tax year.
Why does this article discuss an old rule?
Rule 2D can remain relevant to research, archived approvals, assessments, litigation and interpretation of earlier venture capital investments. It is presented here as historical legal guidance rather than a current exemption application manual.
Editorial note: This article summarizes the original Rule 2D material and explains its historical status. It is not a substitute for checking the official legislation, amendments and orders applicable to a particular assessment or tax year.