Budget 2024: Tax exemptions expanded to retail schemes, ETFs in Gift-IFSC

With the changes, these schemes will now enjoy tax exemptions similar to that of category III AIFs set up in the IFSC

Finance Minister Nirmala Sitharaman on Tuesday announced tax exemptions for retail schemes and exchange-traded funds (ETFs) set up in the International Financial Services Centre (IFSC) Gift City.

With the changes, these schemes will now enjoy tax exemptions similar to that of category III Alternative Investment Funds (AIFs) set up in the IFSC.

Category III funds include AIFs that employ complex trading strategies and may invest in listed and unlisted derivatives. These include hedge funds and private investment in public equity deals.

“This would result in the scheme/fund benefitting from a concessional tax rate of 10 per cent on interest and dividend income and capital gains tax exemption on various securities (other than shares in Indian companies),” said Rahul Jain, Partner, Khaitan & Co.

This amendment will take effect from Assessment Year 2025-26.

Further, finance companies set up in the IFSC will also be exempted from Section 94B of the Income Tax Act, popularly referred to as thin capitalisation rules. It pertains to the deduction of interest expenditure incurred by an Indian company or a permanent establishment of a foreign company.

“IFSC-based finance companies now enjoy an exemption from thin capitalisation rules, encouraging the establishment of finance companies and treasury units,” said Jaiman Patel, Tax Partner – Financial Services, EY India.

At present, interest payment made to non-resident associated enterprises was limited to 30 per cent of Ebitda, with non-banking financial companies, banks and insurance companies being exempted.

Additionally, tax-related exemptions to specified income of core settlement guarantee funds of clearing corporations have been expanded to the clearing corporations set up in the IFSC too.

The government has also announced relief for the venture capital fund (VCF) located in the IFSC. If such a fund extends a loan or other amount to an assessee, it will no longer be called upon to explain the source of funds.