Tax Benefits for Category III AIFs Located in IFSCs

The Government of India, recently notified the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘Amending Act’) amending the Income-tax Act, 1961 (‘ITA’), to provide tax incentives to Category III Alternative Investment Funds (‘AIFs’) located in International Financial Services Centres (‘IFSCs’), with effect from April 1, 2020, as summarised below:

i.     The tax exemption under Section 10(4D) of the ITA provided to Category III AIFs located in IFSCs, of which all the unitholders (other than the sponsor / manager) are non-residents (‘Specified AIF’), has been extended to income from: (i) the transfer of securities (except shares of an Indian company); (ii) securities issued by a non-resident (not being permanent establishment of a non-resident in India), which income does not otherwise accrue or arise in India; and (iii) a securitisation trust (which income is classified as business income). This exemption is limited to the extent such income is attributable to units held by non-residents (not being permanent establishment of the non-resident in India) and calculated in the prescribed manner;

ii.    Section 10(23FBC) has been inserted into the ITA, providing a tax exemption to the unitholders of a Specified AIF with respect to any income accruing /arising or received from such AIF or from the transfer of units in such AIF;

iii.  Section 115AD of the ITA has been amended to prescribe a tax rate of 10% (plus surcharge and cess) on income received by a Specified AIF from securities (such as dividend and interest income). This tax rate applies only to the extent of income that is attributable to units held by non-residents (not being permanent establishment of the non-resident in India) and calculated in the prescribed manner;

iv.  Section 115JEE of the ITA has been amended to provide an exemption from the applicability of alternate minimum tax provisions to Specified AIFs, organised as trusts or limited liability partnerships.