Section 10(23FF) of the Income Tax Act provides a targeted capital gains exemption for non-residents and specified funds in the context of relocation of offshore funds to India.
What’s Exempt:
Capital gains arising or received by:
- A non-resident, or
- A specified fund (typically a Category III AIF in an IFSC), from the transfer of shares of an Indian company, are exempt if:
- The shares were acquired by the specified fund as a result of a relocation from an original offshore fund, and
- The capital gains would have been exempt had the relocation not occurred.
Purpose:
This provision was introduced to facilitate the redomiciling of offshore funds to India—especially to IFSCs like GIFT City—without triggering capital gains tax on legacy investments.
How It’s Calculated:
CBDT has notified Rule 2DD, which provides a formula to compute the exempt portion of capital gains:
Exempt Income= A × B/C
Where:
- A = Total capital gains from transfer of Indian shares,
- B = Daily AUM attributable to non-resident unit holders (excluding permanent establishments in India),
- C = Total daily AUM of the specified fund.
This ensures only the portion of gains attributable to eligible non-resident investors is exempt2.
Example:
Suppose Global Growth Fund, an offshore fund, relocates to GIFT City and becomes a specified fund. It sells shares of an Indian company originally acquired before relocation and earns ₹100 crore in capital gains. If 80% of its AUM is held by eligible non-residents, then ₹80 crore is exempt under Section 10(23FF).
