The International Financial Services Centre (IFSC) at GIFT City in Gujarat offers a unique regulatory environment for financial services entities, including AIF-linked lending vehicles. Finance companies established in GIFT City under the IFSC Authority (Finance Company) Regulations, 2021 provide a structured framework for lending activities. This guide analyses the IFSC finance company rules and their application to AIF-linked lending vehicles.
The IFSC Finance Company Framework
Regulatory Framework
Finance companies in GIFT City are regulated under the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019).
Definition of Finance Company
Regulation 2(1)(e) of the IFSCA (Finance Company) Regulations, 2021 defines "Finance Company" as a company incorporated in the IFSC and registered with the Authority to undertake the business of:
- Lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, or financial lease
- Factoring and forfaiting of receivables
- Functions of Global or Regional Corporate Treasury Centre such as borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other such treasury services and activities
Definition of Finance Unit
Regulation 2(1)(f) defines "Finance Unit" as a unit established in an IFSC by a person resident outside India (other than a company) to undertake finance company activities.
IFSC Finance Company Rules
Section 126 — Conditions and Activities
Rule 126 of the Income-tax Rules, 2026 prescribes the conditions and activities for a finance company located in any IFSC for the purposes of Section 177.
Rule 126(1) — Permitted Activities
A finance company located in any IFSC shall only carry out one or more of the following activities:
- Lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, or financial lease
- Factoring and forfaiting of receivables
- Functions of Global or Regional Corporate Treasury Centre such as borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other such treasury services and activities
Rule 126(2) — Foreign Currency Requirement
The interest being paid by such finance company, being the borrower, in respect of any debt issued by a non-resident, shall be in foreign currency.
Rule 126(3) — Definitions
- "Finance company" means a finance company as defined in regulation 2(1)(e) of the IFSCA (Finance Company) Regulations, 2021
- "International Financial Services Centre" shall have the meaning as assigned to it in Section 2(q) of the Special Economic Zones Act, 2005 (28 of 2005)
Tax Benefits for IFSC Finance Companies
Section 147 — Deduction for IFSC Units
Section 147 provides a deduction of 100% of the income of:
- A scheduled bank, or a bank incorporated under the laws of a country outside India, and having an Offshore Banking Unit in a Special Economic Zone
- A unit of an International Financial Services Centre
The deduction is allowed for:
- For Offshore Banking Units: For twenty consecutive tax years beginning from the relevant tax year; and in a case where the tenth year of deduction ended on 31st March 2025, for further ten consecutive years from the tax year beginning on 1st April 2026
- For IFSC Units: For twenty consecutive tax years out of twenty-five years beginning from the relevant tax year, at the option of an assessee
Section 147(3) — Income Eligible for Deduction
The income eligible for deduction includes:
- Income from an Offshore Banking Unit located in a Special Economic Zone
- Income from the business activities referred to in Section 6(1) of the Banking Regulation Act, 1949
- Income from the approved business activities of any Unit of an IFSC
- Income from transfer of an asset being, an aircraft or a ship, leased by a unit referred to in clause (c) if such unit commenced its business operations by 31st March 2030
Section 218 — Tax on Business Income of IFSC Unit
Section 218 provides that income of the nature referred to in Section 147(3) shall be taxed at the rate of 15%. This is a concessional rate for IFSC units.
AIF-Linked Lending Vehicles in GIFT City
Structure Options
AIF-linked lending vehicles in GIFT City can be structured as:
- Finance Company: A company incorporated in GIFT City and registered with IFSCA
- Finance Unit: A unit established in GIFT City by a person resident outside India
- AIF in GIFT City: An AIF registered in GIFT City under IFSCA (Fund Management) Regulations, 2022
Benefits for AIF-Linked Lending Vehicles
- Concessional Tax Rate: Income taxed at 15% under Section 218
- Deduction: 100% deduction under Section 147 for eligible income
- Regulatory Ease: Streamlined regulatory framework under IFSCA
- Foreign Currency: Transactions in foreign currency
- No Forex Restrictions: Liberalised foreign exchange regime
Activities Permitted
- Lending to AIF portfolio companies (including through loans, guarantees, credit enhancement)
- Securitisation of loan portfolios
- Factoring and forfaiting of receivables
- Treasury functions for AIF groups (borrowing, lending, hedging, cash management)
Structuring AIF-Linked Lending Vehicles
1. Determine the Appropriate Vehicle
- Finance Company: For entities seeking a corporate structure with flexibility
- Finance Unit: For entities outside India seeking to establish a presence
- AIF: For entities seeking AIF registration and pass-through benefits
2. Obtain Regulatory Approvals
- Registration with IFSCA under the Finance Company Regulations
- Registration with SEBI if operating as an AIF
- Any other regulatory approvals as required
3. Ensure Compliance
- Comply with IFSCA regulations
- Comply with SEBI regulations (if applicable)
- Comply with DTC provisions
- Comply with transfer pricing rules (if applicable)
4. Optimise Tax Structure
- Leverage the 15% tax rate under Section 218
- Leverage the 100% deduction under Section 147
- Consider treaty benefits (if applicable)
- Consider GAAR implications
Practical Compliance
1. Maintain Substance
- Ensure the vehicle has genuine substance in GIFT City (office, employees, decision-making)
- Avoid "shell" structures
2. Comply with Regulatory Requirements
- File returns with IFSCA
- Comply with reporting requirements
- Maintain proper records
3. File Tax Returns
- File returns with the income-tax authorities
- Claim the deduction under Section 147
- Calculate tax at 15% under Section 218
4. Monitor Compliance
- Regularly monitor compliance with regulatory and tax requirements
- Update documentation as necessary
Consequences of Non-Compliance
Loss of Tax Benefits
Failure to comply with the conditions may result in loss of the tax benefits under Sections 147 and 218.
Regulatory Action
Non-compliance with IFSCA regulations may result in regulatory action.
Penalties
Non-compliance with tax provisions may result in penalties under the DTC.
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on IFSC finance company structuring for AIF-lending vehicles. Our direct tax experts help AIF managers understand the IFSC framework, structure compliant vehicles, and navigate the regulatory framework. We assist in vehicle selection, regulatory approvals, and tax optimisation.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on IFSC finance company structuring or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex IFSC finance company framework for AIF-lending vehicles requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Vehicle Structuring: Assistance with finance company or AIF structuring
- Regulatory Approvals: Guidance on IFSCA and SEBI approvals
- Tax Optimisation: Assistance with tax planning and compliance
- Representation: Representation before regulatory and tax authorities
Contact us for expert legal guidance on your IFSC finance company matters.