Various Incentives to IFSC proposed in Finance Bill 2025:

Various Incentives to IFSC proposed in Finance Bill 2025 The Union Budget 2025 presented on 1st Feb 2025 by the Hon'ble Finance Minister Nirmala Sitharaman in the parliament. Various changes in direct taxation and measures proposed to promote investment and employment to make the Indian economy better in this Budget.

Incentives to International Financial Services Centre

International Financial Services Centre (IFSC) is a jurisdiction that provides financial services to non-residents and residents, to the extent permissible under the current regulations, in any currency except Indian Rupee. Several tax concessions have been granted to IFSC units under the Act in recent years to encourage the development of world-class financial infrastructure in India. In order to further incentivize operations from IFSC, it is proposed to make the following amendments:-

Extension of sunset dates for several tax concessions pertaining to IFSC

The sunset dates for commencement of operations of IFSC units for several tax concessions, or relocation of funds to IFSC, in clause (d) of sub-section (2) of section 80LA, clause (4D), clause (4F), clause (4H) of section 10 and clause (viiad) of section 47, is proposed to be extended to 31st day of March, 2030. These amendments will take effect from the 1st day of April, 2025.

Exemption on life insurance policy from IFSC Insurance offices

Clause (10D) of section 10 provides exemption to sum received under a life insurance policy including the sum allocated by way of bonus on such policy, subject to the conditions specified therein. The said provisions are also applicable to insurance policies issued by IFSC Insurance Offices. Provisos (fourth, fifth, sixth, and seventh provisos) to the said clause, inter alia, state that the exemption under the said clause is not available if the annual amount of premium or aggregate of premiums payable exceeds Rs.2.5 lakhs for unit linked insurance policies and Rs.5 lakhs for life insurance policies other than unit linked insurance policies. To provide parity to non-residents who obtain life insurance from an IFSC insurance office in comparison to other foreign jurisdictions, it is proposed to amend clause (10D) of section 10 to provide that proceeds received on life insurance policies issued by an IFSC insurance intermediary office are exempt from the above-mentioned condition regarding the maximum premium payable on such policies. These amendments will take effect from the 1st day of April, 2025.

Exemption to capital gains and dividend for ship leasing units in IFSC

Clause (4H) of section 10 provides exemption to non-residents or unit of IFSC engaged in aircraft leasing on capital gains tax on transfer of equity shares of domestic companies being units of IFSC, engaged in aircraft leasing. Further, clause (34B) of section 10 provides exemption to dividend paid by a company being a unit of IFSC engaged in aircraft leasing, to a unit of IFSC engaged in aircraft leasing. It has been represented that similar to aircraft leasing business, in the ship leasing business, separate special purpose vehicles (SPVs) are created for one or more vessels to safeguard the investors. Therefore, on the lines of aircraft leasing, it is proposed to extend the exemption in,–

(I) Clause (4H) of section 10 to non-residents or units of IFSC engaged in ship leasing on capital gains tax on transfer of equity shares of domestic companies being units of IFSC, engaged in ship leasing.

(II) Clause (34B) of section 10 to dividend paid by a company being a unit of IFSC engaged in ship leasing, to a unit of IFSC engaged in ship leasing.

These amendments will take effect from the 1st day of April, 2025.

Rationalization of definition of ‘dividend’ for treasury centres in IFSC

Sub-clause (e) of clause (22) of section 2, inter alia, provides that dividend includes any sum by way of advance or loan to a shareholder paid by a company (not being a company in which the public are substantially interested), where shareholder is the beneficial owner of shares holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Sub-clause (ii) of clause (22) of section 2 excludes from the definition of dividend (may be referred to as deemed dividend) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. Suggestions have been received that borrowings by the corporate treasury centre in IFSC from any group entities could trigger deemed dividend provisions in the hands of the shareholder. It is proposed to amend clause (22) of section 2 to provide that any advance or loan between two group entities, where one of the group entity is a “Finance company” or a “Finance unit” in IFSC set up as a global or regional corporate treasury centre for undertaking treasury activities or treasury services and the ‘parent entity’ or ‘principal entity’ of such ‘group entity’ is listed on stock exchange in a country or territory outside India, other than the country or territory outside India as may be specified by the Board in this behalf, shall not be treated as ‘dividend’. The conditions for a ‘group entity’, ‘principle entity’ and the ‘parent entity’ shall be prescribed. These amendments will take effect from the 1st day of April, 2025.

Simplified regime for fund managers based in IFSC

Section 9A inter alia provides that the fund management activity carried out through an eligible fund manager acting on behalf of eligible investment fund shall not constitute business connection in India, subject to the conditions mentioned therein. One of the conditions at clause (c) of sub-section (3) of section 9A inter alia provides that the eligible investment fund shall fulfil the condition that the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five per cent of the corpus of the fund. Sub-section (8A) of section 9A inter alia provides that the Central Government may by notification specify that any one or more of the conditions specified in sub-section (3) or sub-section (4), shall not apply or shall apply with such modifications, in case of an eligible investment fund and its eligible fund manager, if such fund manager is located in an IFSC and has commenced its operations on or before the 31st day of March, 2024. It has been represented that there a need to provide a specific simplified regime for IFSC based fund managers, managing funds situated in other jurisdiction so that fund managers in IFSC are at par with the fund management entities in competing foreign jurisdiction. It is proposed to amend the provisions of section 9A so that –

(I) The condition at clause (c) of sub-section (3) of section 9A is rationalized for all the eligible investment funds whether or not their eligible fund managers are based in IFSC, by determining the aggregate participation or investment in the fund as on the 1st day of April and the 1st day of October of the previous year and in case the said condition at clause (c) is not satisfied on either of the said days, it shall be provided that it will satisfy the same condition within four months of the said days;

(II) In view of the rationalization above, the condition at clause (c) of sub-section (3) of section 9A shall not be modified for any eligible investment fund and its eligible fund manager; and

(III) The other conditions (a) to (m) can be relaxed for a eligible investment fund where the date of commencement of operations by its eligible fund manager located in IFSC for the purposes of sub-section (8A) of section 9A is on or before 31st day of March, 2030.

These amendments will take effect from the 1st day of April, 2025.

Amendment of Section 10 related to Exempt income of Non-Residents

The existing provisions of clause (4E) of section 10 of the Act provide that any income accrued or arisen to, or received by a non-resident on account of transfer of non-deliverable forward contracts or offshore derivative instruments or over the-counter derivatives, or distribution of income on offshore derivative instruments entered into with an offshore banking unit of an International Financial Services Centre referred to in sub-section (1A) of section 80LA shall not be included in the total income of the non-resident. In order to further incentivize operations from the IFSC, it is proposed to amend clause (4E) of section 10 to provide that the income of a non-resident on account of transfer of non-deliverable forward contracts or offshore derivative instruments or over the-counter derivatives, or distribution of income on offshore derivative instruments, entered into with Foreign Portfolio Investors being an IFSC unit shall also not be included in the total income subject to certain conditions as may be prescribed. This amendment will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years.