Draft Income Tax Rule 284 – Conditions for the purpose of Schedule VI [Table: Sl. No. 5] of the Act
Rule 284 of the Draft Income-tax Rules, 2026 prescribes the conditions under which income earned by a non-resident from specific derivative transactions will be exempt under Schedule VI [Table: Sl. No. 5] of the Act. The exemption applies to income arising from the transfer of non-deliverable forward contracts, offshore derivative instruments, or over-the-counter derivatives, as well as income distributed from such instruments. However, this exemption is available only if certain conditions are satisfied. First, the derivative contract or instrument must be entered into by the non-resident with an offshore banking unit located in an International Financial Services Centre (IFSC) that holds a valid registration under the International Financial Services Centres Authority (Banking) Regulations, 2020, or with a Foreign Portfolio Investor that is a unit of an IFSC. Second, the transaction must not be entered into by the non-resident through or on behalf of its permanent establishment in India. The rule places responsibility on the offshore banking unit or the Foreign Portfolio Investor to ensure compliance with the condition that the transaction is not linked to a permanent establishment in India. The rule also clarifies key definitions relevant to the exemption, including “derivative,” “non-deliverable forward contract,” “offshore banking unit,” “offshore derivative instrument,” “over-the-counter derivatives,” “permanent establishment,” and “Foreign Portfolio Investor.” A non-deliverable forward contract is defined as a contract settled in foreign currency based on the difference between a pre-agreed exchange rate and the spot rate at maturity. Overall, the rule establishes the eligibility conditions and definitional framework governing tax exemption for non-resident derivative transactions conducted through IFSC-based financial entities.
Extract of Rule No. 284 of Draft Income-tax Rules, 2026
Rule 284
Conditions for the purpose of Schedule VI [Table: Sl. No. 5] of the Act.
(1) The income accrued or arisen to, or received by, a non-resident as a result of—
(a) transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives; or
(b) distribution of income on offshore derivative instruments or over-the-counter derivatives, under Schedule VI [Table: Sl. No. 5] of the Act, shall be exempted subject to fulfilment of the following conditions, namely:—
(i) the non-deliverable forward contract or offshore derivative instrument or over the-counter derivative is entered into by the non-resident with an offshore banking unit of an International Financial Services Centre which holds a valid certificate of registration granted under International Financial Services Centers Authority (Banking) Regulations, 2020 by the International Financial Services Centres Authority or any Foreign Portfolio Investor being a unit of an International Financial Services Centre; and
(ii) such contract, instrument or derivative is not entered into by the non-resident through or on behalf of its permanent establishment in India.
(2) The offshore banking unit or the Foreign Portfolio Investor shall ensure that the condition provided in sub- rule (1)(ii) is complied with.
(3) For the purposes of this rule,—
(a) “derivative” shall have the same meaning as assigned to it in section 2(ac) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(b) “a non-deliverable forward contract” shall mean a contract for the difference between an exchange rate agreed before and the actual spot rate at maturity, with the spot rate being taken as the domestic rate or a market determined rate and such contract being settled with a single payment in a foreign currency;
(c) “offshore banking unit” means a banking branch Unit located in an International Financial Services Centre; (d) “offshore derivative instrument” shall have the same meaning as assigned to it in regulation 2(1)(o) of the SEBI (Foreign Portfolio Investors) Regulations, 2019; (e) “over-the-counter derivatives” shall mean a derivative contract that is not traded on an exchange but instead is privately negotiated between a purchaser and a seller;
(f) “permanent establishment” shall have the meaning as assigned to it in section 173(c) of the Act; and
(g) “Foreign Portfolio Investor” means a person registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
