Government Expands Tax Exemptions for Non-Residents in IFSC under Section 10(4E) of Income Tax Act
Government Expands Tax Exemptions for Non-Residents in IFSC under Section 10(4E) of Income Tax Act
In a significant move to enhance India's attractiveness as a global financial hub, the Government has introduced key amendments to Section 10(4E) of the Income Tax Act, 1961, through the Finance Bill, 2025. These amendments extend tax exemptions to non-residents engaged in financial transactions in International Financial Services Centres (IFSCs), thereby fostering greater foreign investment in India's offshore financial ecosystem.
Expanded Scope of Exemption
Section 10(4E) of the Income Tax Act was originally designed to exempt income arising from the transfer of specific financial instruments, including non-deliverable forward contracts, offshore derivative instruments, and over-the-counter (OTC) derivatives. The provision also covered the distribution of income on offshore derivative instruments, ensuring that non-residents conducting such transactions in an IFSC were not subject to Indian taxation.
Previously, the exemption under Section 10(4E) was limited to derivative transactions conducted by non-residents with Offshore Banking Units (OBUs). However, the Finance Bill, 2025, has widened this scope by allowing non-residents to avail of the exemption when transacting with Foreign Portfolio Investors (FPIs) that operate as units within an IFSC. This move is expected to increase the volume of cross-border derivative transactions and enhance liquidity in IFSCs.
Government Amendment Further Expands Benefits
Taking this initiative a step further, a Government Amendment to the Finance Bill, 2025, has proposed an additional expansion. The amendment extends the exemption to include the distribution of income from Over-the-Counter (OTC) derivative contracts, provided such contracts are executed by a non-resident with either an OBU or an FPI operating in an IFSC.
This development marks a strategic push to align India's financial policies with global best practices, reinforcing IFSCs as competitive financial hubs. By exempting these transactions from taxation, the government aims to attract more global investors and bolster India's position as a preferred destination for international financial services.
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