Finance Bill 2025: Strategic Reforms to Boost IFSC as a Global Financial Hub

Apart from AIFs, the Fund Management Regulations in IFSC also provide for launching Retail Schemes and ETFs. However, Inbound Retail Schemes and ETFs in IFSC had not taken-off due to the lack of a specific tax regime for them. In the July 2024 Budget, the scope of ‘specified fund’ (i.e. Funds which are provided a special tax regime) was expanded to include a Retail Scheme or an Exchange Traded Fund regulated by IFSCA, subject to conditions. Such conditions were also notified in late January 2025. Accordingly, tax regime for inbound Retail Schemes and ETF is now on par with inbound Category-III AIF in IFSC.

Since the above amendment provided a certainty in tax regime for Retail schemes and ETFs in IFSC, there were representations by stakeholders that such Funds should also be brought within the ambit of tax neutral relocation. Accordingly, a key proposal in the Bill is the extension of tax-neutral relocation benefits to retail funds and exchange-traded funds (ETFs) in IFSC.

This move is expected to encourage more India-focused mutual funds and ETFs to shift their operations to the IFSC without facing additional tax liabilities, aligning with the government’s “onshoring the offshore” vision.

Capital markets

Derivatives regulated by the IFSCA and issued by a Foreign Portfolio Investor (FPI) are to be regarded as legal and valid contracts with effect from 2023. Accordingly, non-banking entities in IFSC registered as FPIs are now permitted to enter into OTC derivatives/ ODIs.

Further, the IFSCA issued a circular dated 2 May 2024, that enabled non-bank IFSC entities holding SEBI FPI registration, to issue Offshore Derivative Instruments (ODIs) with Indian securities as underlying. Accordingly, non-banking entities in IFSC registered as FPIs are now permitted to enter into the ODIs/ OTC contracts.

Currently, non-residents have been exempted from the incomes received as a result of transfer of NDFs/ OTCs/ ODIs and distribution of income on ODIs entered into with IBUs.

The said exemption in the hands of the non-residents was not available for other IFSC units registered with SEBI as an FPI undertaking ODI/OTC business. Hence, a non-resident, receiving distribution income from IFSC unit, being a tax resident, shall be subject to double taxation in India as the IFSC unit would already have paid tax on the income.

Thus,  it is proposed to extend the exemption to non-resident on the specified incomes received under the ODI/OTC contract from any IFSC entity registered as an FPI.

This change broadens the existing tax exemption—which currently covers only banking units—to include non-banking FPIs like specified funds, finance companies, and broker-dealers, thereby boosting the growth of the OTC derivatives and ODI business from the IFSC.

Treasury centres

Under the Income-tax Act, if a company gives an advance or loan to a shareholder, or to a business where the shareholder is a member or partner with a significant interest, or makes any payment for the benefit of that shareholder, it is deemed to be dividend.

A treasury center of an entity or a group enables it to centralise and concentrate cash and risk management to gain economies of scale, process efficiencies, and tighter control of cash flow in the group. The establishment of a treasury centre in the IFSC allows corporations to manage their global treasury operations such as foreign exchange and risk management, asset management, and advisory related to mergers and acquisitions etc.

Under the present provision, deemed dividend would be applicable to Treasury centres. Further enhancing IFSC's attractiveness, the bill exempts loans and advances between Global Treasury Centres in IFSC and other group entities of listed foreign parent companies from being treated as "deemed dividends."

Insurance Sector

In the insurance sector, the entire proceeds from life insurance policies issued by intermediary offices in IFSC will be exempt from tax, provided that the premium in any given year does not exceed 10% of the actual capital sum assured. This initiative is expected to spur the participation of life insurance companies in the IFSC, particularly to develop a robust NRI-focused retail insurance business.

Ship leasing

In the ship leasing business, separate SPVs are created for one or more vessels. This is done to ensure safeguards and ring fence the financers/ investors from the risk of one or more ship(s) held in one SPV from another.  Considering that this layered structure of Hold Co. and SPVs setup in IFSC is created for the ring-fencing purposes, it is important to exempt the capital gains and dividend income earned by the IFSC Holding company from its IFSC SPVs.

For the ship leasing business, which operates on a Holding Company-SPV model in IFSC, the Finance Bill 2025 offers several tax exemptions. These include relief on dividend income from SPVs to IFSC shipping entities and capital gains arising from the transfer of SPV shares by both IFSC entities and non-residents. Additionally, capital gains on the transfer of shares of IFSC shipping entities by non-residents will also be exempt, establishing tax parity with aircraft lessors and encouraging global ship lessors and owners to set up operations in the IFSC.

Other measures include extension of sunset dates for various business incentives to March 31, 2030, to mitigate uncertainty and support long-term business growth.

With these comprehensive reforms, Finance Minister Sitharaman aims to attract a diverse range of financial services businesses to the IFSC, reinforcing India's emergence as a formidable global financial hub and boosting investor confidence in the evolving financial landscape.

Suresh Swamy is Partner, Price Waterhouse & Co LLP and  Nivitha Navaneethakrishnan, Associate Director,  Price Waterhouse & Co LLP.