Finance companies located in International Financial Services Centres enjoy special tax treatment under the Income Tax Act, 2025. Section 177 and Rule 126 specify the eligible activities and conditions for this favourable treatment. Understanding these provisions is essential for finance companies operating in IFSCs.
The Statutory Framework
Section 177
Section 177 provides that the limitation on interest deduction in certain cases shall not apply to a Finance Company located in any International Financial Services Centre, subject to conditions.
Rule 126
Rule 126 specifies the eligible activities for a finance company located in an International Financial Services Centre.
Eligible Activities
Core Activities
A finance company located in an IFSC may only carry out one or more of the following activities:
Lending Activities:
- Lending in the form of loans, commitments, and guarantees
- Credit enhancement
- Securitisation
- Financial lease
Factoring and Forfaiting:
- Factoring and forfaiting of receivables
Treasury Centre Functions:
- Borrowings
- Lending
- Hedging of currency or commodity risk
- Investments
- Cash management
- Structured credit
- Intra-group financing
- Financial budgeting
- Similar treasury services and activities
Conditions
Foreign Currency Borrowing
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. This ensures that the IFSC finance company is engaged in genuine cross-border financial activities.
Registration
The finance company must be registered under the International Financial Services Centres Authority (Finance Company) Regulations, 2021.
Business Operations
The finance company must be located in an International Financial Services Centre and must satisfy such conditions and carry on such activities as may be prescribed.
Tax Benefits
Interest Deduction
The limitation on interest deduction under Section 177 does not apply to IFSC finance companies, allowing for greater flexibility in financing arrangements.
Exemptions
Income from certain activities of IFSC units may be exempt under Schedule VI of the Act.
Compliance Requirements
Registration
- Obtain registration under IFSCA regulations
- Maintain valid registration throughout operations
Documentation
- Maintain records of all activities
- Document compliance with conditions
- File required returns
Reporting
- File tax returns on time
- Report income from eligible activities separately
- Maintain transfer pricing documentation
Expert Legal Guidance
Understanding IFSC finance company provisions is essential for entities operating in IFSCs. Anuj Desai & Associates provides expert advisory services on IFSC tax compliance, helping finance companies structure their operations to maximise benefits.