Section 10(4F)-Income of Non-Resident by way of Royalty or Interest, on account of Lease of An Aircraft

Section 10(4F) of the Income Tax Act, 1961 in India provides an exemption for income earned by a non-resident by way of royalty or interest on account of the lease of an aircraft or an aircraft engine to an Indian company or entity engaged in the business of operating aircraft. This provision was introduced to encourage foreign investment in the aviation sector and facilitate the leasing of aircraft by non-residents to Indian operators without subjecting such income to tax in India.

Provisions of Section 10(4F)

Exemption:

• Any income earned by a non-resident in the form of:
• Royalty (e.g., lease rentals or payments for the use of an aircraft or aircraft engine).
• Interest (e.g., interest on loans or financing arrangements related to the lease of an aircraft or aircraft engine).
• The income must arise from the lease of an aircraft or aircraft engine to an Indian company or entity engaged in the business of operating aircraft.

Conditions:

• The recipient must be a non-resident as defined under Section 6 of the Income Tax Act (e.g., an individual or entity staying in India for less than 182 days in a financial year or meeting other non-residency criteria).
• The lessee must be an Indian company or an entity (e.g., a partnership firm, LLP, or other entity) engaged in the business of operating aircraft (e.g., commercial airlines, charter services, or cargo operators).
• The income must be specifically from the lease of an aircraft or aircraft engine, including payments classified as royalty (for the use of the equipment) or interest (on financing related to the lease).
• The lease agreement must comply with applicable regulations, including those under the Foreign Exchange Management Act (FEMA) for foreign currency transactions.

Scope of Exemption:

• Covers royalty income such as lease rentals paid by the Indian company for the use of the aircraft or aircraft engine.
• Covers interest income arising from financing arrangements directly linked to the lease (e.g., interest on a loan taken by the Indian company to finance the lease).
• Does not cover other types of income, such as capital gains from the sale of the aircraft or income from other services (e.g., maintenance or crew provision), unless separately exempt.

Example of Section 10(4F)

Scenario 1:

• Facts:
  • FlyHigh Leasing Ltd., a non-resident company based in Ireland, leases a commercial aircraft to AirIndia Ltd., an Indian company engaged in operating passenger flights.
  • The lease agreement, executed in FY 2024-25, provides for annual lease rentals of ₹5,00,00,000 (classified as royalty) paid in USD to FlyHigh Leasing Ltd.
  • Additionally, FlyHigh Leasing Ltd. earns ₹50,00,000 as interest on a loan provided to AirIndia Ltd. to finance the lease of the aircraft.
• Tax Treatment:
  • The royalty income of ₹5,00,00,000 (lease rentals) is exempt under Section 10(4F) because:
    • FlyHigh Leasing Ltd. is a non-resident.
    • The income is from the lease of an aircraft to an Indian company (AirIndia Ltd.) engaged in aircraft operations.
    • The payment qualifies as royalty under the Income Tax Act.
  • The interest income of ₹50,00,000 is also exempt under Section 10(4F) because it is directly linked to the financing of the aircraft lease.
  • If FlyHigh Leasing Ltd. sells the aircraft and earns a capital gain, that gain is not exempt under Section 10(4F) and may be taxable under the head “Capital Gains.”

Scenario 2:

• Facts:
  • SkyLease Inc., a non-resident company in Singapore, leases an aircraft engine to a resident Indian partnership firm, BlueSky Charters, which operates charter flights.
  • In FY 2024-25, SkyLease Inc. earns ₹2,00,00,000 as lease rentals (royalty).
  • SkyLease Inc. becomes a resident in India in FY 2024-25 due to changes in its management’s place of control.
• Tax Treatment:
  • The royalty income of ₹2,00,00,000 is not exempt under Section 10(4F) because SkyLease Inc. is no longer a non-resident.
  • The income will be taxable in India under the head “Income from Other Sources” or as royalty under Section 9(1)(vi), subject to applicable tax rates (e.g., 40% for a foreign company, plus surcharge and cess).