The International Financial Services Centre (IFSC) stands to benefit significantly from recent legislative amendments designed to improve the tax environment for outbound funds established within the IFSC.
These changes are intended to enhance the overall appeal and investment climate for IFSC funds. Currently, if a resident individual invests in an IFSC fund that invests in overseas securities, the gains from the transfer (excluding redemption) of such units are deemed to be short-term capital gains (treated as Specified Mutual Fund) and subject to an applicable tax rate which could be as high as 39 per cent to 42 per cent, depending on whether the individual has opted for the new tax regime or not.
Additionally, when the IFSC outbound fund invests in Global funds/ETFs, gains from such investments are also deemed to be short-term capital gains in the hands of the IFSC Outbound fund, taxable at the maximum marginal rate of 39 per cent to 42 per cent, depending on whether the IFSC Outbound fund has opted for the new tax regime or not.
Central to the proposed changes is the updated definition of 'Specified Mutual Funds. This amendment specifies that any mutual fund allocating more than 65 per cent of its total proceeds to debt and money market instruments regulated by SEBI qualifies under this category. Importantly, the revised definition now excludes offshore securities including equities/debt and equity-oriented offshore funds.
Furthermore, in terms of taxation, the bill proposes a lower tax rate for long-term capital gains of 12.5 per cent, plus any applicable surcharge and cess. Additionally, the required holding period for these securities to qualify for long-term capital gains treatment has been proposed to be reduced from 36 months to 24 months.
Accordingly, the transfer of units in a Global fund/ETF or transfer of units of an IFSC outbound fund by a resident individual will now be taxed as long-term capital gains at a rate of 12.5 per cent, plus any applicable surcharge and cess, if held for more than 24 months, compared to the current tax treatment of 39 per cent to 42 per cent.
Moreover, the Reserve Bank of India (RBI) has also relaxed conditions for resident individuals to remit money under the Liberalized Remittance Scheme (LRS) to IFSC. Although LRS remittances continue to be subject to a 20 per cent Tax Collected at Source (TCS) beyond a certain threshold, the recent budget proposal introduces a provision to offset this TCS against Tax Deducted at Source (TDS) on salaries. This change is expected to incentivize salaried individuals to channel more funds into IFSC, particularly into outbound funds, enabling resident Indians to invest in these funds without facing heightened taxation.
These strategic amendments signify a major advancement in reinforcing IFSC;'s role as a vibrant channel for global investment flows, creating a more favorable tax framework for outbound funds operating within the center.
