The Indian Income Tax Act, 1961, provides several exemptions under Section 10 to incentivize foreign investments, facilitate international collaborations, and promote economic development. These provisions are particularly relevant for non-residents, foreign companies, and entities operating within special frameworks like International Financial Services Centres (IFSCs).
This article delves into the nuances of the exemptions under Section 10 of Income Tax Act, categorizing them based on their relevance and impact.
I. Exemptions for Non-Residents and Offshore Entities
1. Interest on Non-Resident External (NRE) Account [Section 10(4)
Income by way of interest earned on funds deposited in an NRE account by a non-resident individual is fully exempt. This exemption under section 10 of Income Tax Act aims to encourage foreign currency inflows and facilitate savings for Indians working abroad.
2. Interest on Specified Offshore Rupee-Denominated Bonds [Section 10(4C)]
Interest income derived by a non-resident or a foreign company from Rupee-denominated bonds issued by Indian entities or business trusts is exempt. This provision promotes foreign participation in the Indian debt market and facilitates cost-effective financing for Indian businesses.
3. Income from Transfer of Specified Assets by Funds [Section 10(4D)]
Income earned by specified funds from the transfer of certain securities, bonds, or derivatives is exempt. These funds, often set up for investment purposes, play a crucial role in deepening India’s financial markets.
4. Derivative Transactions with Offshore Banking Units in IFSC [Section 10(4E)]
Non-residents engaged in financial transactions involving non-deliverable forward contracts, offshore derivatives, or over-the-counter derivatives with offshore banking units in IFSCs are exempt from tax on income arising from such transfers. This provision enhances the competitiveness of IFSCs as global financial hubs.
5. Royalty or Interest Income on Aircraft/Ship Lease [Section 10(4F)]
Non-residents earning royalty or interest from the lease of aircraft or ships to units within an IFSC are eligible for tax exemptions. This exemption supports the growth of the aviation and maritime sectors in India.
6. Portfolio Income from IFSC [Section 10(4G)]
Income earned by non-residents from securities or financial instruments maintained with an offshore banking unit in an IFSC is tax-free. This incentivizes the establishment of financial portfolios in IFSCs, making India a global financial hub.
7. Income of Non-Residents or Units in IFSC [Section 10(4H)]
Non-residents or units in IFSCs benefit from exemptions on certain categories of income specified under this section, further enhancing IFSCs’ appeal.
II. Special Exemptions for Remuneration and Payments
1. Remuneration for Non-Citizens [Section 10(6)]
Salaries received by non-citizens for their services in India are exempt under specific conditions. This provision facilitates foreign expertise and collaboration in key sectors.
2. Tax Paid on Behalf of Foreign Entities [Section 10(6BB)]
When the Indian government bears the tax liability for foreign states or enterprises as part of aircraft lease agreements, such payments are exempt. This simplifies tax compliance for foreign entities involved in leasing arrangements.
3. Income from Security-Related Projects [Section 10(6C)]
Foreign companies earning income from projects integral to India’s national security are exempt, reflecting the importance of fostering international cooperation in defense and infrastructure.
4. Royalties and Technical Fees [Section 10(6D)]
Payments to non-residents by way of royalty or technical service fees arising from collaborations with the National Technical Research Organisation (NTRO) are exempt from tax.
III. Exemptions for Interest and Lease Income
1. Interest Income [Section 10(15)]
Certain categories of interest income are exempt, subject to conditions specified in the Act. This provision encourages financial inflows through interest-bearing instruments.
2. Income from Aircraft Leasing [Section 10(15A)]
Non-residents leasing aircraft or engines to Indian entities benefit from exemptions on lease-related income, supporting the aviation industry.
3. Cruise Ship Lease Rentals [Section 10(15B)]
Foreign companies earning lease rentals from cruise ships deployed in India are exempt from tax. This provision bolsters the tourism and shipping industries.
IV. Exemptions for International Entities and Funds
1. European Economic Community (EEC) [Section 10(23BBB)]
The income of the European Economic Community derived from operations in India is tax-exempt, promoting international partnerships.
2. SAARC Fund for Regional Projects [Section 10(23BBC)]
Income derived by the SAARC Fund for Regional Projects is exempt, fostering regional cooperation and development.
3. Specified Fund Income [Section 10(23FBC)]
Income from the transfer of units in specified funds is exempt, encouraging investments in high-growth sectors.
4. Sovereign Wealth Funds and Pension Funds [Section 10(23FE)]
The income of wholly owned subsidiaries of Abu Dhabi Investment Authority, Sovereign Wealth Funds, and specified pension funds from eligible investments is exempt, attracting long-term, stable capital.
V. Exemptions for Crude Oil and Energy Transactions
1. Income from Sale of Crude Oil in India [Section 10(48)]
Foreign companies selling crude oil in Indian currency enjoy exemptions, ensuring seamless trade.
2. Crude Oil Storage and Sale [Section 10(48A)]
Income from the storage of crude oil in Indian facilities and its subsequent sale to Indian residents is exempt, ensuring energy security.
3. Sale of Leftover Crude Oil Stock [Section 10(48B)]
Income from the sale of residual crude oil stock after the expiry of agreements is exempt, simplifying compliance for foreign companies.
VI. Capital Gains and Dividends
1. Capital Gains on Indian Companies [Section 10(23FF)]
Capital gains from the transfer of shares in Indian companies by non-residents or specified funds are exempt, incentivizing foreign investments in Indian businesses.
2. Dividends from IFSC Units [Section 10(34B)]
Dividends earned by units of an IFSC engaged in leasing aircraft are exempt, boosting investment in aviation leasing activities.
Summary
The exemptions under Section 10 are pivotal in fostering economic growth, attracting foreign investments, and enhancing India’s global competitiveness in sectors like finance, aviation, and energy. These provisions highlight India’s commitment to creating a robust ecosystem for international business and cooperation.
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