Section 10(23FBC) of the Income Tax Act provides a tax exemption for income earned by a unit holder from a specified fund, or on transfer of units in such a fund.
Key Features:
- Who’s Covered: Unit holders (investors) in a specified fund.
- What’s Exempt:
- Any income accruing, arising to, or received by the unit holder from the fund, and
- Any income from transfer of units in the fund.
Definitions:
- Specified Fund: As defined in the Explanation to Section 10(4D), it typically includes:
- Category III Alternative Investment Funds (AIFs) located in an International Financial Services Centre (IFSC),
- Registered with SEBI, and
- Whose units are held by non-residents (excluding units held through a permanent establishment in India).
- Unit: Includes any beneficial interest in the fund—such as shares, partnership interests, or other instruments.
Example:
Suppose Global Alpha Fund, a Category III AIF located in GIFT City (an IFSC), earns income from trading in derivatives and securities. A non-resident investor, Mr. Lee, holds units in the fund and receives ₹1 crore in income and later sells his units for a ₹50 lakh gain.
Under Section 10(23FBC), both the ₹1 crore income and ₹50 lakh capital gain are exempt from tax in India—provided the fund qualifies as a “specified fund” and Mr. Lee doesn’t have a permanent establishment in India.
This provision is part of India’s strategy to attract global capital into IFSCs by offering a tax-neutral platform for international investors.
