On January 27, 2025, the Ministry of Finance, through the Central Board of Direct Taxes (CBDT), issued the Income Tax (Second Amendment) Rules, 2025, aiming to introduce new tax incentives for entities operating within International Financial Services Centres (IFSCs).
The amendment, aims to facilitate the growth of venture capital and financial services in these specialized zones.
Key Changes in the Amendment
Venture Capital Fund Criteria:
- A new rule, 2DAA, has been added, clarifying the conditions for venture capital funds under Section 10, clause (23FB) of the Income Tax Act. It states that the Venture Capital Fund will be categorized as a Category I Alternative Investment Fund under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, enacted under the International Financial Services Centres Authority Act, 2019.
Regulations for Finance Companies in IFSCs:
- Rule 21ACA introduces specific conditions for finance companies operating within IFSCs under Section 94B of the Income Tax Act.
- These companies are allowed to engage in various financial activities such as lending, securitization, financial leasing, and global treasury functions (including hedging and intra-group financing).
- Additionally, the rule stipulates that interest payments made by these finance companies, when borrowing from non-resident entities, must be in foreign currency.
Regulations on Retail Schemes and Exchange-Traded Funds (ETFs):
- A new sub-rule under 21AIA outlines the conditions for retail schemes and ETFs operating in IFSCs, as follows:
- Retail Schemes must have a minimum of 20 investors, with no investor owning more than 25% of the scheme. Investment limits are also set for associated investments, unlisted securities, and single-company stakes.
- Exchange-Traded Funds (ETFs) must be listed and traded on a recognized stock exchange and comply with specific regulations under the IFSC Act.
Clarifications in the Explanation:
- The amendment also introduces several definitions, including that of an “associate,” a “fund management entity,” and a “specified fund,” all of which have specific meanings as per the International Financial Services Centres Authority regulations.
Effective Date : January 27th 2025
