Amendment in Rule 21AK of the Income-tax Rules, 1962
Amendment in Rule 21AK of the Income-tax Rules, 1962
Section 10(4E) Scope Expanded: Income-tax Rule 21AK Amended via G.S.R. 503(E)
On July 30, 2025, the Central Board of Direct Taxes (CBDT) issued a new notification — G.S.R. 503(E) — amending Rule 21AK of the Income-tax Rules, 1962. This amendment was made in exercise of the powers under Section 295 read with Section 10(4E) of the Income-tax Act, 1961. These changes aim to broaden the scope of tax exemptions available to non-residents, particularly those investing through International Financial Services Centres (IFSCs).
Here’s a breakdown of what this amendment means and why it matters.
🔍 What is Section 10(4E)?
Section 10(4E) provides an income-tax exemption to non-residents on:
- Income earned from the transfer of offshore derivative instruments (ODIs), or
- Over-the-counter (OTC) derivatives, or
- Securities issued by a unit located in an International Financial Services Centre (IFSC).
The exemption applies only when the income is not taxable in India under any other provision.
🛠️ Key Changes in Rule 21AK
1️⃣ Inclusion of Over-the-Counter Derivatives
- Old Rule: Only offshore derivative instruments were mentioned.
- New Rule: Now includes “over-the-counter derivatives”.
- Impact: Expands the scope of tax exemption under Section 10(4E) to cover income from OTC derivatives, which are widely used in global financial markets.
2️⃣ Recognition of FPIs Operating in IFSCs
- The amendment adds that Foreign Portfolio Investors (FPIs), if they are units of an IFSC, also qualify for the exemption.
- This means that income from ODIs or OTC derivatives issued by such FPIs is now covered under the tax exemption.
3️⃣ Clarification in Sub-rule (2)
- The rule now includes both offshore banking units and Foreign Portfolio Investors for the purpose of exemption eligibility.
- This ensures broader participation and tax neutrality for various investment structures within IFSCs.
4️⃣ Revised Definitions in the Explanation
The amendment updates the language and adds a clear definition of “Foreign Portfolio Investor”:
“Foreign Portfolio Investor” means a person registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019.
This clarification aligns the Income-tax Rules with SEBI’s regulatory framework.
✅ Why This Amendment Matters
| Benefit | Description |
|---|---|
| 🔄 Broader Applicability | More financial instruments (like OTC derivatives) now qualify for exemption. |
| 🌍 Supports Global Investors | FPIs within IFSCs gain tax certainty, making India a more attractive financial hub. |
| 📘 Regulatory Clarity | Aligns definitions with SEBI regulations, reducing ambiguity. |
| 💼 Boost to IFSC Ecosystem | Reinforces India’s position as a global financial services centre, particularly in GIFT City. |
🧾 Conclusion
The Income-tax (Twentieth Amendment) Rules, 2025 mark an important move toward liberalizing India’s tax regime for international investors. By including OTC derivatives and FPIs within the IFSC framework, the government aims to provide clarity, enhance ease of doing business, and position India as a competitive destination for cross-border capital.
Investors, tax professionals, and fund managers should take note of these changes when evaluating India-bound investment structures.
Also Read: New Income-tax Bill 2025 Navigator
Also Read:
- Recommendations of the 55th Meeting of the GST Council
- Changes in GST and Income Tax during the Financial Year 2024-25
- TDS and TCS provisions applicable from April 1, 2025
- Rationalizing TDS: A Deep Dive into Budget 2025’s Proposals
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