New Delhi, Feb. 3 -- The International Financial Service Centre (IFSC), popularly referred to as Gujarat International Finance Tech City (GIFT City), has been a focus area with frequent measures from the government, aimed at increasing inbound investments into the centre to make it a destination of choice, compared with other global financial centres.

Established in 2015 through an Indian government initiative to establish a world-class financial hub in the country, IFSC hosts a range of financial institutions such as Indian and foreign banks, insurance providers, asset management companies, fintech hubs, international exchanges and capital market investment companies. As a special zone, the IFSC offers financial services to residents and non-residents in any currency, except the Indian rupee.

In addition to existing tax incentives/deductions and exemptions enjoyed by the IFSC units, Budget 2025 proposes to provide additional relaxations to further vitalise investors and businesses to plough money into IFSCs.

Some key amendments proposed with respect to IFSCs are as follows:

#Transfer of unit/interest/share, pursuant to relocation of offshore funds, to funds (namely Alternate Investment Fund - Category I, II and III) based in IFSC, is currently tax exempt in the hands of the shareholders. The exemption was limited to AIF funds, which has now been extended to Exchange-Traded Funds (ETFs) and retail schemes with effect from 1 April 2025. This is to stimulate more overseas funds, mainly in Singapore and Mauritius, to relocate to India.

#Income received by non-residents from an IFSC banking unit pursuant to the transfer of derivative instruments is exempt from tax in India. From 1 April 2025, it is proposed to extend this exemption to Foreign Portfolio Investors (FPIs) that are units within the IFSC. This brings certainty to non-resident investors as their income from these transactions will be tax-exempt, indirectly benefiting FPIs through increased transaction volumes.

#Sum received under a life insurance policy (including policies issued by an IFSC insurance office) is exempt from tax subject to specified conditions. However, in cases where the policy premium exceeds the prescribed limits, such proceeds become taxable. It is now proposed to exempt the insurance proceeds received from the IFSC insurance office, irrespective of the policy proceeds exceeding the prescribed premium limits.

#Loans or advances from closely held companies to significant shareholders are subject to tax as "deemed dividend." From 1 April 2025, it has been proposed to specifically exclude any loans/advances by corporate treasury centres of finance companies in IFSC from the scope of "deemed dividend." As the treasury centre of an entity/group enables the centralisation and concentration of cash and risk management to gain economies of scale, process efficiencies and tighter control of cash flow in the group, this amendment would further enhance the IFSC's appeal to foreign investors.

#An offshore fund, which is classified as "eligible fund", is not considered as tax resident of India nor does it constitute a business connection in India, even if the fund manager is located in India. There are multiple conditions to qualify as an "eligible fund," which primarily include restrictions/thresholds on participation in the fund's corpus, remuneration paid to the fund manager, etc. These conditions (except the condition of person residents in India not having more than 5% fund corpus) are proposed to be relaxed for investment funds whose manager is located in IFSC.

#Other changes include the extension of sunset dates for the commencement of operations in IFSC to 31 March 2030 for various existing tax exemptions available to IFSC, such as the transfer of aircraft/ship, royalty and interest paid by IFSC on aircraft/ship leasing, etc.

The government has been promoting entities to be set up in this region, based on the success of similar cases seen globally. The initial feedback received from stakeholders was related to operational challenges of setting up the IFSC. This has now been addressed by regulators. This will push enterprises to have a presence in the GIFT City, ultimately strengthening India's position in the global economy.

Anil Talreja is Partner, M&A Tax, and Reema Bhane is Associate Director, M&A Tax, Deloitte India.

Published by HT Digital Content Services with permission from VC Circle.