Our Category III AIF is registered in GIFT City and some of its unit holders are Indian residents. What exactly is exempt under section 10(4D)?
Section 10(4D) exempts income of a specified fund of four described kinds — income from the transfer of a capital asset referred to in section 47(viiab) on a recognised stock exchange located in an IFSC where the consideration is paid or payable in convertible foreign exchange; income from the transfer of securities other than shares in a company resident in India; income from securities issued by a non-resident, not being a permanent establishment of a non-resident in India, where that income does not otherwise accrue or arise in India; and income from a securitisation trust chargeable under the head 'Profits and gains of business or profession'. The exemption runs only 'to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit', computed in the prescribed manner.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Section 10(4D) of the Income-tax Act, 1961. It bears on section 10(4D), section 47(viiab), section 80LA(1A), section 6, section 92F, section 115TCA, section 43(5) of the Income Tax Act 1961, in Capital Gains Exemptions and Capital Gains matters.
The attribution rule is the whole provision. Section 10(4D) is not a fund-level exemption; it is a proportionate exemption measured by non-resident unit holding, so every resident-held unit reduces the exempt fraction, and the computation is left to prescribed rules. Alongside that, the definition of 'specified fund' in clause (c) of the Explanation is itself a set of conditions, and item (III) of sub-clause (i)(I) requires that all the units other than a unit held by a sponsor or manager are held by non-residents. There is a proviso to that item which practitioners should know: where a unit holder who was non-resident in the previous year when the units were issued becomes resident under section 6(1) or section 6(1A) in a later previous year, the condition is not breached if the aggregate value and number of units held by such resident unit holders do not exceed five per cent of the total units issued and such other prescribed conditions are fulfilled. Note also the shape of the qualifying fund: sub-clause (i) covers a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate which is registered as a Category III Alternative Investment Fund under the SEBI (Alternative Investment Funds) Regulations 2012 or regulated under the IFSCA (Fund Management) Regulations 2022, or which holds a certificate as a retail scheme or an Exchange Traded Fund satisfying the conditions for such schemes under those 2022 Regulations, and which is located in an IFSC; sub-clause (ii) covers the investment division of an offshore banking unit registered as a Category-I foreign portfolio investor which has commenced operations on or before 31 March 2030 and fulfils prescribed conditions including maintenance of separate accounts for its investment division.
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Not a case. The Explanation to clause (4D) supplies the definitions on which the clause turns. 'Convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act 1999 and the rules made thereunder. 'Investment division of offshore banking unit' means an investment division of a banking unit of a non-resident located in an International Financial Services Centre, as referred to in section 80LA(1A), which has commenced its operations on or before 31 March 2030. 'Permanent establishment' has the meaning in clause (iiia) of section 92F. 'Securities' has the meaning in clause (h) of section 2 of the Securities Contracts (Regulation) Act 1956 and also includes such other securities or instruments as may be notified. 'Securitisation trust' has the meaning in clause (d) of the Explanation to section 115TCA. 'Specified fund' means (i) a fund established or incorporated in India in the form of a trust, a company, a limited liability partnership or a body corporate which (I)(a) has been granted a certificate of registration as a Category III Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations 2022, or (b) has been granted a certificate as a retail scheme or an Exchange Traded Fund and satisfies the conditions laid down for such schemes or funds under those 2022 Regulations; (II) which is located in any International Financial Services Centre; and (III) of which all the units other than a unit held by a sponsor or manager are held by non-residents, with a proviso for a unit holder who was non-resident when the units were issued and later becomes resident under section 6(1) or section 6(1A), where the aggregate value and number of units held by such resident unit holders do not exceed five per cent of the total units issued and such other prescribed conditions are fulfilled; or (ii) the investment division of an offshore banking unit which has been granted a certificate of registration as a Category-I foreign portfolio investor under the SEBI (Foreign Portfolio Investors) Regulations 2019 and which has commenced its operations on or before 31 March 2030, and which fulfils such conditions including maintenance of separate accounts for its investment division as may be prescribed. 'Sponsor', 'trust' and 'unit' are separately defined, 'unit' meaning the beneficial interest of an investor in the fund and including shares or partnership interests. One date in that Explanation is not safe. The Department's 2025 page prints 31 March 2030 both in clause (aa) and in clause (c)(ii)(I). The extension to 2030 in clause (aa) is authorised by clause 6(a) of the Finance Bill 2025; that clause amends the Explanation to clause (4D) only "in clause (aa)", and does not touch clause (c)(ii)(I), which the Department's 2024 (No. 1) page prints as 31 March 2025. The 2030 figure in clause (c)(ii)(I) is therefore stated on the Department's page alone and is not corroborated.
Clause (4D) exempts from total income any income accrued or arisen to, or received by, a specified fund as a result of the transfer of a capital asset referred to in clause (viiab) of section 47 on a recognised stock exchange located in any International Financial Services Centre where the consideration for the transaction is paid or payable in convertible foreign exchange, or as a result of the transfer of securities other than shares in a company resident in India, or any income from securities issued by a non-resident not being a permanent establishment of a non-resident in India and where such income otherwise does not accrue or arise in India, or any income from a securitisation trust which is chargeable under the head 'Profits and gains of business or profession' — in each case to the extent that the income accrued or arisen to, or received, is attributable to units held by a non-resident, not being the permanent establishment of a non-resident in India, or is attributable to the investment division of an offshore banking unit, computed in the prescribed manner.
Not a judicial route. The clause is the income-side counterpart to section 47(viiab): section 47 takes the qualifying IFSC-exchange transaction outside the definition of transfer for the non-resident who trades on that exchange, and section 10(4D) exempts the corresponding income where the trading is done through a pooled vehicle located in the Centre. Because such a vehicle is established IN India, an unqualified exemption would let resident money obtain the benefit designed for offshore money; the drafting answer is not to exclude residents from the fund altogether — the definition permits a sponsor and manager to hold units, and the proviso tolerates a small resident tail — but to make the exemption proportionate to non-resident holding, so that the relief tracks the offshore character of the capital rather than the location of the vehicle. The parallel treatment of the investment division of an offshore banking unit extends the same logic to a bank's proprietary book in the Centre, with a separate-accounts condition to keep that book identifiable.
to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit, as the case may be, computed in the prescribed manner.
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Handle my notice → Ask a CA on WhatsAppSection 10(4D) exempts income of a specified fund of four described kinds — income from the transfer of a capital asset referred to in section 47(viiab) on a recognised stock exchange located in an IFSC where the consideration is paid or payable in convertible foreign exchange; income from the transfer of securities other than shares in a company resident in India; income from securities issued by a non-resident, not being a permanent establishment of a non-resident in India, where that income does not otherwise accrue or arise in India; and income from a securitisation trust chargeable under the head 'Profits and gains of business or profession'. The exemption runs only 'to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit', computed in the prescribed manner. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(4D), section 47(viiab), section 80LA(1A), section 6, section 92F, section 115TCA, section 43(5) of the Income Tax Act 1961. It is reported as Section 10(4D) of the Income-tax Act, 1961. The attribution rule is the whole provision. Section 10(4D) is not a fund-level exemption; it is a proportionate exemption measured by non-resident unit holding, so every resident-held unit reduces the exempt fraction, and the computation is left to prescribed rules. Alongside that, the definition of 'specified fund' in clause (c) of the Explanation is itself a set of conditions, and item (III) of sub-clause (i)(I) requires that all the units other than a unit held by a sponsor or manager are held by non-residents. There is a proviso to that item which practitioners should know: where a unit holder who was non-resident in the previous year when the units were issued becomes resident under section 6(1) or section 6(1A) in a later previous year, the condition is not breached if the aggregate value and number of units held by such resident unit holders do not exceed five per cent of the total units issued and such other prescribed conditions are fulfilled. Note also the shape of the qualifying fund: sub-clause (i) covers a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate which is registered as a Category III Alternative Investment Fund under the SEBI (Alternative Investment Funds) Regulations 2012 or regulated under the IFSCA (Fund Management) Regulations 2022, or which holds a certificate as a retail scheme or an Exchange Traded Fund satisfying the conditions for such schemes under those 2022 Regulations, and which is located in an IFSC; sub-clause (ii) covers the investment division of an offshore banking unit registered as a Category-I foreign portfolio investor which has commenced operations on or before 31 March 2030 and fulfils prescribed conditions including maintenance of separate accounts for its investment division. If it applies to you, the first step is this: Do not treat the fund as exempt at the fund level: compute the exempt portion by attribution to units held by non-residents and to the investment division of an offshore banking unit, as the closing words of section 10(4D) require, and apply the prescribed manner of computation.
Not a case. The Explanation to clause (4D) supplies the definitions on which the clause turns. 'Convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act 1999 and the rules made thereunder. 'Investment division of offshore banking unit' means an investment division of a banking unit of a non-resident located in an International Financial Services Centre, as referred to in section 80LA(1A), which has commenced its operations on or before 31 March 2030. 'Permanent establishment' has the meaning in clause (iiia) of section 92F. 'Securities' has the meaning in clause (h) of section 2 of the Securities Contracts (Regulation) Act 1956 and also includes such other securities or instruments as may be notified. 'Securitisation trust' has the meaning in clause (d) of the Explanation to section 115TCA. 'Specified fund' means (i) a fund established or incorporated in India in the form of a trust, a company, a limited liability partnership or a body corporate which (I)(a) has been granted a certificate of registration as a Category III Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations 2022, or (b) has been granted a certificate as a retail scheme or an Exchange Traded Fund and satisfies the conditions laid down for such schemes or funds under those 2022 Regulations; (II) which is located in any International Financial Services Centre; and (III) of which all the units other than a unit held by a sponsor or manager are held by non-residents, with a proviso for a unit holder who was non-resident when the units were issued and later becomes resident under section 6(1) or section 6(1A), where the aggregate value and number of units held by such resident unit holders do not exceed five per cent of the total units issued and such other prescribed conditions are fulfilled; or (ii) the investment division of an offshore banking unit which has been granted a certificate of registration as a Category-I foreign portfolio investor under the SEBI (Foreign Portfolio Investors) Regulations 2019 and which has commenced its operations on or before 31 March 2030, and which fulfils such conditions including maintenance of separate accounts for its investment division as may be prescribed. 'Sponsor', 'trust' and 'unit' are separately defined, 'unit' meaning the beneficial interest of an investor in the fund and including shares or partnership interests. One date in that Explanation is not safe. The Department's 2025 page prints 31 March 2030 both in clause (aa) and in clause (c)(ii)(I). The extension to 2030 in clause (aa) is authorised by clause 6(a) of the Finance Bill 2025; that clause amends the Explanation to clause (4D) only "in clause (aa)", and does not touch clause (c)(ii)(I), which the Department's 2024 (No. 1) page prints as 31 March 2025. The 2030 figure in clause (c)(ii)(I) is therefore stated on the Department's page alone and is not corroborated. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Clause (4D) exempts from total income any income accrued or arisen to, or received by, a specified fund as a result of the transfer of a capital asset referred to in clause (viiab) of section 47 on a recognised stock exchange located in any International Financial Services Centre where the consideration for the transaction is paid or payable in convertible foreign exchange, or as a result of the transfer of securities other than shares in a company resident in India, or any income from securities issued by a non-resident not being a permanent establishment of a non-resident in India and where such income otherwise does not accrue or arise in India, or any income from a securitisation trust which is chargeable under the head 'Profits and gains of business or profession' — in each case to the extent that the income accrued or arisen to, or received, is attributable to units held by a non-resident, not being the permanent establishment of a non-resident in India, or is attributable to the investment division of an offshore banking unit, computed in the prescribed manner.
Not a judicial route. The clause is the income-side counterpart to section 47(viiab): section 47 takes the qualifying IFSC-exchange transaction outside the definition of transfer for the non-resident who trades on that exchange, and section 10(4D) exempts the corresponding income where the trading is done through a pooled vehicle located in the Centre. Because such a vehicle is established IN India, an unqualified exemption would let resident money obtain the benefit designed for offshore money; the drafting answer is not to exclude residents from the fund altogether — the definition permits a sponsor and manager to hold units, and the proviso tolerates a small resident tail — but to make the exemption proportionate to non-resident holding, so that the relief tracks the offshore character of the capital rather than the location of the vehicle. The parallel treatment of the investment division of an offshore banking unit extends the same logic to a bank's proprietary book in the Centre, with a separate-accounts condition to keep that book identifiable. In the words reproduced by the source cited on this page: "to the extent such income accrued or arisen to, or is received, is attributable to units held by non-resident (not being the permanent establishment of a non-resident in India) or is attributable to the investment division of offshore banking unit, as the case may be, computed in the prescribed manner."
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Section 10(4D) of the Income-tax Act, 1961. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(4D), section 47(viiab), section 80LA(1A), section 6, section 92F, section 115TCA, section 43(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Clause (4D) exempts from total income any income accrued or arisen to, or received by, a specified fund as a result of the transfer of a capital asset referred to in clause (viiab) of section 47 on a recognised stock exchange located in any International Financial Services Centre where the consideration for the transaction is paid or payable in convertible foreign exchange, or as a result of the transfer of securities other than shares in a company resident in India, or any income from securities issued by a non-resident not being a permanent establishment of a non-resident in India and where such income otherwise does not accrue or arise in India, or any income from a securitisation trust which is chargeable under the head 'Profits and gains of business or profession' — in each case to the extent that the income accrued or arisen to, or received, is attributable to units held by a non-resident, not being the permanent establishment of a non-resident in India, or is attributable to the investment division of an offshore banking unit, computed in the prescribed manner. It arises in Capital Gains Exemptions and Capital Gains matters, on section 10(4D), section 47(viiab), section 80LA(1A), section 6, section 92F, section 115TCA, section 43(5) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Test each income stream against the four described categories before attributing anything — income falling outside them is outside section 10(4D) however the fund is registered. For the securities limb, note the carve-out in terms: it is the transfer of securities OTHER THAN shares in a company resident in India, and 'securities' takes the meaning in clause (h) of section 2 of the Securities Contracts (Regulation) Act 1956 together with any instruments notified by the Central Government. For the non-resident-issued securities limb, check the two qualifications the clause carries: the issuer must not be a permanent establishment of a non-resident in India, and the income must not otherwise accrue or arise in India. Check the unit register against item (III) of the specified fund definition — all units other than those held by a sponsor or manager must be held by non-residents — and where a former non-resident holder has become resident, rely on the proviso only if the resident-held units are within five per cent of total units issued in both value and number and the prescribed conditions are met. For an investment division of an offshore banking unit, verify Category-I FPI registration, that operations commenced on or before 31 March 2030, and that separate accounts are maintained for the investment division as the clause requires. Keep the registration or certificate — Category III AIF, or retail scheme or Exchange Traded Fund under the IFSCA (Fund Management) Regulations 2022 — and evidence that the fund is located in an International Financial Services Centre, on the permanent file; both are part of the definition, not merely background.
Still good law. Validity could be checked only in part. The clause and the whole of its Explanation were read on the current published text of section 10 and re-read there with the same result; that text breaks off before the amendment footnotes, and the footnotes are simply absent from what is available, so NO COMMENCEMENT DATE OR AMENDING ACT CAN BE ESTABLISHED FOR THIS CLAUSE from it. The clause was also read on the immediately preceding published version, which allows two figures to be dated. Explanation clause (aa) reads 31 March 2025 there against 31 March 2030 on the current text, and that substitution is independently authorised by clause 6(a) of the Finance Bill 2025. The corresponding figure in Explanation clause (c)(ii)(I) also moves from 2025 to 2030 between those two versions, but NO INSTRUMENT AUTHORISING THAT CHANGE HAS BEEN FOUND — clause 6(a) of the Bill amends clause (aa) only — so that figure rests on a single source and should be checked against the Act before a client is advised that an offshore banking unit's investment division commencing operations after 31 March 2025 is within the definition. The cross-referenced provisions — section 47(viiab) and section 80LA(1A) — were read on their own current texts and correspond to what clause (4D) describes; that is the corroboration available. No judicial decision construing section 10(4D) has been found: a search for 'International Financial Services Centre' with 'specified fund', restricted to Tribunal and court decisions, returned eighteen results and none of them concerns an IFSC fund. So every proposition in this entry is a reading of the statutory words and none of it is authority. The attribution rule in particular — the words 'computed in the prescribed manner' at the end of the clause — has not been tested anywhere, and the prescribed manner is not set out in this entry. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a statutory entry, not a decision, and 'decided_on' is not a decision date. It is 1 April 2025, the effective date of the version of section 10 used here, and NOT the date on which clause (4D) was inserted or last amended, which has not been established. THE AMENDMENT FOOTNOTES ARE NOT AVAILABLE. The consolidated text of section 10 is long and breaks off before the footnotes at the foot of it, so no amending Act and no commencement date can be given for this clause, and nothing in this entry should be read as supplying one. A reader who needs the clause as it stood for an earlier year must go to the amending Acts. TWO THINGS THIS ENTRY DOES NOT COVER. Clause (23FF) of section 10, the companion exemption on the relocation of a fund to an International Financial Services Centre, could not be read: the consolidated text breaks off at clause (12C) on one printing and at clause (23C) on another, and nothing is said about it here or anywhere in this entry. And the phrase 'computed in the prescribed manner' at the end of clause (4D) points to a rule that has not been read, so the mechanics of the attribution computation — how the exempt fraction is worked out where the non-resident holding changes during the year, and what happens to income that accrued before a change in holding — are not stated. That is a serious gap for anyone advising a fund, because the attribution rule is the whole provision. ONE DATE IN THE EXPLANATION IS NOT SAFE. The current text prints 31 March 2030 both in clause (aa) and in clause (c)(ii)(I). The extension to 2030 in clause (aa) is authorised by clause 6(a) of the Finance Bill 2025, which amends the Explanation only 'in clause (aa)' and does not touch clause (c)(ii)(I); the immediately preceding version gives that figure as 31 March 2025. The 2030 figure in clause (c)(ii)(I) therefore rests on a single source and is not corroborated. Check it before relying on it for an offshore banking unit that commenced operations after 31 March 2025. Finally, a point about what the clause does and does not reach. The exemption is proportionate: it runs only to the extent the income is attributable to units held by a non- resident, not being the permanent establishment of a non-resident in India, or to the investment division of an offshore banking unit. A fund that satisfies every condition of the definition of 'specified fund' still loses the exemption on the fraction attributable to its sponsor's and manager's units and to any resident tail permitted by the proviso, and that fraction is taxable in the fund's own hands in the ordinary way. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Clause (4D) exempts from total income any income accrued or arisen to, or received by, a specified fund as a result of the transfer of a capital asset referred to in clause (viiab) of section 47 on a recognised stock exchange located in any International Financial Services Centre where the consideration for the transaction is paid or payable in convertible foreign exchange, or as a result of the transfer of securities other than shares in a company resident in India, or any income from securities issued by a non-resident not being a permanent establishment of a non-resident in India and where such income otherwise does not accrue or arise in India, or any income from a securitisation trust which is chargeable under the head 'Profits and gains of business or profession' — in each case to the extent that the income accrued or arisen to, or received, is attributable to units held by a non-resident, not being the permanent establishment of a non-resident in India, or is attributable to the investment division of an offshore banking unit, computed in the prescribed manner.
TaxSphere, “Statutory position — section 10(4D): what a specified fund in an IFSC is exempt on, and how much of it survives the non-resident test”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-10-4d-specified-fund-in-an-ifsc-exemption/ (validity last checked 2026-09-08)
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A non-resident client sold derivatives on the exchange in GIFT City and was paid in dollars. Is there any capital gains charge in India?
Our securitisation trust pays excess interest spread to the originator, who met its retention requirement by cash collateral rather than by buying PTCs. Were we obliged to deduct under section 194LBC?
Our securitisation trust is distributing to PTC holders. Do we still deduct at twenty-five or thirty per cent, and who is taxed on the trust's income?
Beyond section 10(4D), what other income connected with an IFSC unit is exempt — particularly on aircraft leasing and on derivatives written by an offshore banking unit?
