IFSC- Exempt income for Non-Residents in Derivatives- FAQs – Budget 2025

Section 10(4E) of the Income Tax Act, 1961 provides exemptions for non-residents involved in specific derivative transactions, such as non-deliverable forward contracts, offshore derivative instruments, and over-the-counter derivatives. The Finance Bill 2025 extends this exemption to include transactions conducted with Foreign Portfolio Investors (FPIs) that are units within the International Financial Services Centre (IFSC). However, the exemption applies only to the non-residents involved in such transactions, not the FPIs themselves. To qualify for the benefit under section 10(4E), the FPI must be a unit within an IFSC and meet prescribed conditions. This amendment aims to encourage more non-resident investments by providing tax certainty and benefits to the non-residents involved in these derivative transactions, while also benefiting the FPIs by increasing investment activity. The relevant rules for this provision are outlined in Rule 21-AK of the Income Tax Rules, 1962.

FAQ: Incentives to IFSC- Exempt income of Non-Residents in Derivate Transactions- Budget 2025

Q.1 What are the transactions of derivatives that are covered under section 10(4E) of the Income tax Act, 1961

Ans. The transactions that are covered under section 10(4E) are

(i) transfer of

• • non-deliverable forward contracts; or
  • offshore derivative instruments; or
  • over-the-counter derivatives; or

(ii) distribution of income on offshore derivative instruments

Q.2 What are the changes made by the Finance Bill 2025 to grant exemption under section 10(4E)?

Ans. The exemption for transactions in derivatives was limited to the transactions made by non-residents with Offshore Banking Units. By the Finance Bill 2025, these benefits are now also being extended to such transactions, made with a Foreign Portfolio Investor (FPIs) being a unit in the IFSC.

Q.3 Whether the exemption u/s 10(4E) of IT Act, 1961 is available to the non-residents holding such contract or instrument or derivative or the FPI (unit of an IFSC)?

Ans. The exemption u/s 10(4E) is available to the non-resident and not the FPI

Q.4 What is FPI in respect of which a non-resident can claim benefits under section 10(4E) of Income Tax Act, 1961?

Ans. A non-resident can claim benefits under section 10(4E) in respect of transactions with an FPI which that is a person, registered in accordance with the provisions of the SEBI (FPI) Regulations, 2019 and is also a unit in the IFSC

Q.5 Can transactions with all FPIs be eligible for benefit under the provisions u/s 10(4E)?

Ans. To claim the benefit under section 10(4E), the FPI must be a Unit in an IFSC and should fulfil such conditions as prescribed.

Q.6 Is income from transfer of, or distribution on derivatives mentioned in section 10(4E) exempt for FPIs under this provision?

Ans. No, the exemption in this clause is provided for the income of the non-resident from the transactions mentioned in section 10(4E) which are entered into with an OBU or an FPI mentioned therein.

Q.7 Who will benefit from this amendment?

Ans. The non-residents who enter into such transactions are benefited as the income from the aforementioned transactions is exempt. This will also benefit the FPIs in that there will be more investments from non-residents because of the certainty provided in the domestic tax law.

Q.8 Where are the rules prescribed for this section till date?

Ans. The rules prescribed for this section are Rule 21-AK in the Income Tax Rules, 1962.