The Finance Bill 2025 proposes amendments to Section 2 of the Income-tax Act to clarify the definition of “dividend” for treasury centres in the International Financial Services Centres (IFSC). The amendment introduces a new provision excluding loans or advances between two group entities where one is a finance company or finance unit set up in the IFSC, provided the parent or principal entity is listed on a foreign stock exchange. This change aims to prevent such transactions from being classified as deemed dividends under certain conditions. The rules for group entities, parent entities, and principal entities involved in these transactions will be specified in further regulations. The amendment also includes updates on the treatment of virtual digital assets and unit-linked insurance policies. These changes will be effective from April 1, 2025. Additionally, the Bill outlines clarifications to capital asset definitions and the classification of crypto-assets under virtual digital assets for tax purposes.
Rationalisation 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.
2. 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.
3. 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.
4. 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.
5. These amendments will take effect from the 1st day of April, 2025.
[Clause 3]
Extract of Relevant Clauses of Finance Bill, 2025
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause (14) of the said section provides in sub-clause (b) that “capital asset”, means any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992. Further, sub-clause (c) of the said clause, provides that capital asset means any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof.
It is proposed to amend sub-clause (b) of the said clause so as to insert the expression “or held by an investment fund specified in clause (a) of Explanation 1 to section 115UB” after the words “Foreign Institutional Investor”.
It is further proposed to amend sub-clause (c) of clause (14) of the said section so as to make it applicable for unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Clause (22) of the said section provides the definition of dividend. Sub-clause (e) of the said clause, inter alia, provides that any payment by a company, not being a company in which the public are substantially interested, of any sum, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. 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 (hereafter in this clause referred to as the said concern) 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.
It is proposed to insert a new sub-clause (iia) in the said clause so as to provide that dividend does not include––
(iia) any advance or loan between two group entities, where,––
(A) one of the group entity is a “Finance company” or a “Finance unit”; and
(B) the parent entity or principal entity of such group 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;
It is further proposed to define the expressions “Finance company” or a “Finance unit”, and “group entity”, “parent entity” and “principal entity” in the Explanation to the said clause.
These amendments will take effect from 1st April, 2025.
It is also proposed to amend the clause (47A) of the said section to provide that the definition of virtual digital asset includes any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions, whether or not already included in the definition of virtual digital asset.
This amendment will take effect from 1st April, 2026.
Extract of Relevant Amendment Proposed by Finance Bill, 2025
3. Amendment of section 2.
In section 2 of the Income-tax Act,–– Amendment of section 2.
(a) in clause (14), with effect from the 1st April, 2026,–
(i) in sub-clause (b), after the words “Foreign Institutional Investor”, the words, brackets, letters and figures “or held by an investment fund specified in clause (a) of Explanation 1 to section 115UB” shall be inserted;
(ii) in sub-clause (c), the words “on account of the applicability of the fourth and fifth provisos thereof” shall be omitted;
(b) in clause (22),––
(i) in the long line, after sub-clause (ii), the following sub-clause shall be inserted, namely:––
‘(iia) any advance or loan between two group entities, where,––
(A) one of the group entity is a “Finance company” or a “Finance unit”; and
(B) the parent entity or principal entity of such group 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;’;
(ii) in Explanation 3, after clause (b), the following clauses shall be inserted, namely:––
‘(c) “Finance Company” and “Finance Unit” shall have the same meaning as assigned respectively to them in clauses (e) and (f) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019:
Provided that such Finance Company or Finance Unit, is set up as a global or regional corporate treasury centre for undertaking treasury activities or treasury services as per the relevant regulations made by the International Financial Services Centres Authority established under section 4 of the said Act;
(d) “group entity”, “parent entity” and “principal entity” shall be such entities which satisfy such conditions as prescribed in this behalf.’;
(c) in clause (47A), after sub-clause (c) and before the proviso, the following sub-clause shall be inserted with effect from the 1st April, 2026, namely:––
“(d) any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions, whether or not such asset is included in sub-clause (a) or sub-clause (b) or sub-clause (c):”.
