The Finance Act, 2021 has introduced a new provision under section 10(4D) of the Income-tax Act, 1961 (the Act) to provide exemption from tax deducted at source (TDS) for certain payments made by a unit located in an International Financial Services Centre (IFSC) to a non-resident or a person resident outside India.
This provision is applicable from 1st April 2024 and is aimed at facilitating the ease of doing business and reducing the compliance burden for the units operating in IFSC.
According to section 10(4D), any income of a non-resident or a person resident outside India, by way of interest, dividend or long-term capital gains, arising from an investment made by him on or after the 1st day of April, 2024, in a unit of an IFSC, shall be exempt from TDS, if the investment is made out of convertible foreign exchange.
This means that if a non-resident or a person resident outside India invests in an IFSC unit using foreign currency, he will not have to pay any TDS on the income earned from such investment. This will make the IFSC units more attractive for foreign investors and help them save on tax costs.
However, this exemption is subject to certain conditions, such as:
- The unit of the IFSC should be set up under the Special Economic Zones Act, 2005 and should have commenced its operations on or after the 1st day of April, 2016.
- The investment made by the non-resident or the person resident outside India should be in accordance with the regulations prescribed by the Reserve Bank of India, the Securities and Exchange Board of India or any other relevant regulatory authority.
- The income earned by the non-resident or the person resident outside India should be in respect of an investment that is not directly or indirectly connected with any permanent establishment of such person in India.
- The income earned by the non-resident or the person resident outside India should not be deemed to accrue or arise in India under section 9(1) of the Act, except for clause (v) or clause (vi) of sub-section (1) of section 9.
The above conditions are intended to ensure that only genuine investments made by non-residents or persons resident outside India in IFSC units are eligible for TDS exemption and that there is no misuse of this provision for tax avoidance or evasion.
The introduction of section 10(4D) is a welcome step by the government to boost the growth and development of IFSC as a global financial hub. It will also enhance the competitiveness and attractiveness of IFSC units for foreign investors and promote capital inflows into India
