Section 10(4E)-Income of Non-Resident from Transfer of Non-Deliverable Forward Contracts

Section 10(4E) of the Income Tax Act, 1961 in India provides an exemption for income earned by a non-resident from the transfer of non-deliverable forward contracts (NDFs) or income from offshore derivative instruments (ODIs) entered into with an offshore banking unit in an International Financial Services Centre (IFSC). This provision, introduced to promote financial activities in IFSCs like GIFT City, Gujarat, aims to attract non-resident investors by exempting specific income from tax in India.

Provisions of Section 10(4E)

Exemption:

• Any income earned by a non-resident from:
• The transfer of non-deliverable forward contracts or offshore derivative instruments (or both).
• Income arising from such contracts or instruments entered into with an offshore banking unit of a banking company or financial institution located in an IFSC.

Conditions:

• The recipient must be a non-resident as defined under Section 6 of the Income Tax Act.
• The transaction must involve non-deliverable forward contracts or offshore derivative instruments (e.g., futures, options, or swaps) entered into with an offshore banking unit in an IFSC.
• The income must arise from the transfer of such contracts/instruments or from the settlement of these contracts (e.g., gains from price differences).
• The offshore banking unit must be regulated by the International Financial Services Centres Authority (IFSCA).
• The contracts or instruments must comply with the regulations prescribed by the IFSCA or other relevant authorities.

Scope of Exemption:

• Income from the transfer of NDFs or ODIs, including capital gains or profits from buying and selling these instruments.
• Income from settlement of such contracts, such as cash settlements based on the difference between the agreed price and the market price at maturity.
• The exemption applies only to income accruing to non-residents and not to residents or not ordinarily resident individuals.

Example of Section 10(4E)

Scenario 1:

• Facts:
  • Mr. Alex, a non-resident living in the USA, enters into a non-deliverable forward contract with an offshore banking unit of a bank in GIFT City (IFSC).
  • The NDF is based on the USD-INR exchange rate, with a notional value of $100,000 and a forward rate of ₹85 per USD for a 6-month period.
  • At maturity, the spot rate is ₹87 per USD. The contract is cash-settled, and Mr. Alex earns a profit of $2,000 (₹87 – ₹85 = ₹2 × $100,000 = ₹2,00,000, converted to $2,000 at the spot rate).
• Tax Treatment:
  • The profit of $2,000 (₹2,00,000) from the settlement of the NDF is exempt from income tax in India under Section 10(4E) because:
    • Mr. Alex is a non-resident.
    • The contract is an NDF entered into with an offshore banking unit in an IFSC.
    • The income arises from the settlement of the contract.
  • If Mr. Alex were a resident, this income would be taxable under the head “Income from Other Sources” or “Capital Gains,” depending on the nature of the transaction.

Scenario 2:

• Facts:
  • Ms. Priya, a non-resident in Singapore, purchases an offshore derivative instrument (e.g., a participatory note) issued by an offshore banking unit in GIFT City, linked to the NIFTY 50 index.
  • She sells the ODI after 3 months, earning a profit of ₹5,00,000 (equivalent to $6,000) due to an increase in the index value.
• Tax Treatment:
  • The ₹5,00,000 profit from the transfer of the ODI is exempt under Section 10(4E) because:
    • Ms. Priya is a non-resident.
    • The ODI was entered into with an offshore banking unit in an IFSC.
    • The income arises from the transfer of the ODI.
  • If the same transaction were conducted with an entity outside an IFSC, the exemption would not apply, and the income could be taxable.