Big gain for NRIs: Finance Bill 2025 widens IFSC tax exemptions to include FPIs, boosting foreign investments

A quiet yet transformative shift is underway in India’s financial ecosystem. The International Financial Services Centre (IFSC), once a niche jurisdiction catering exclusively to cross-border financial services, is now at the heart of policy reforms designed to attract global investors. The latest development comes with the Finance Bill 2025, which introduces key tax exemptions poised to reshape investment dynamics within the IFSC framework.

The IFSC, defined under Section 2(q) of the Special Economic Zone Act, 2005, is a jurisdiction that facilitates financial services to both non-residents and residents, provided the transactions do not involve the Indian Rupee. To bolster the development of a world-class financial infrastructure, the government has consistently offered tax incentives under the Income-tax Act, 1961, including exemptions, deductions, and benefits for fund relocation to IFSC units.

New tax exemptions under section 10(4E)
The Income-tax Act’s section 10(4E) previously limited exemptions on income from derivative transactions to non-residents engaging with Offshore Banking Units (OBUs). However, the Finance Bill 2025 extends these benefits to transactions involving Foreign Portfolio Investors (FPIs) that are units within the IFSC. This amendment widens the scope, enabling non-residents to claim exemptions on income derived from dealings with both OBUs and eligible FPIs.

The derivative transactions covered under section 10(4E) include:

• Transfer of non-deliverable forward contracts
• Offshore derivative instruments
• Over-the-counter derivatives
• Distribution of income on offshore derivative instruments

Notably, the exemption applies solely to non-residents, not the FPIs themselves. To qualify, the FPI must be registered under the SEBI (FPI) Regulations, 2019, and operate as a unit within the IFSC. Non-residents engaging with such FPIs can claim tax benefits, provided specific conditions are met.

Impact of the amendment
Non-residents stand to benefit significantly as their income from these transactions will be tax-exempt. This certainty in domestic tax laws is expected to attract more foreign investments, indirectly benefiting FPIs through increased transaction volumes. The regulatory framework supporting these provisions is detailed under Rule 21-AK of the Income-tax Rules, 1962.