Section 10(4G)-Income received by a Non-Resident from Portfolio of Securities or Financial Products or Funds

Section 10(4G) of the Income Tax Act, 1961 in India provides an exemption for certain income earned by a non-resident from a portfolio of securities, financial products, or funds managed or administered by a portfolio manager in an International Financial Services Centre (IFSC), such as GIFT City, Gujarat. This provision was introduced to promote investment activities in IFSCs by offering tax benefits to non-residents, encouraging foreign capital inflows into India’s financial markets.

Provisions of Section 10(4G)

Exemption:

• • Any income received by a non-resident from:
  • A portfolio of securities, financial products, or funds managed or administered by a portfolio manager in an account maintained with an offshore banking unit in an IFSC.
  • The income must be received in foreign currency.

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 income must arise from a portfolio of securities, financial products, or funds managed by a portfolio manager operating in an IFSC.
  • The account must be maintained with an offshore banking unit in an IFSC, regulated by the International Financial Services Centres Authority (IFSCA).
  • The income must be received in foreign currency (e.g., USD, EUR) as per the Foreign Exchange Management Act (FEMA) regulations.
  • The portfolio management activities must comply with SEBI or IFSCA regulations governing portfolio managers.

Scope of Exemption:

• • Income such as capital gains (short-term or long-term) from the transfer of securities or financial products in the portfolio.
  • Interest or dividend income from securities or financial products held in the portfolio.
  • Other income directly attributable to the portfolio managed by the portfolio manager in the IFSC.
  • The exemption applies only to income received by non-residents and not to residents or not ordinarily resident individuals.

Example of Section 10(4G)

Scenario 1:

• Facts:
  • Mr. John, a non-resident living in the UK, maintains an investment account with an offshore banking unit in GIFT City, Gujarat (IFSC).
  • The account is managed by a SEBI-registered portfolio manager operating in the IFSC.
  • The portfolio includes Indian equities, bonds, and mutual fund units.
  • In FY 2024-25, Mr. John earns:
    • ₹3,00,000 as short-term capital gains from the sale of equity shares.
    • ₹1,50,000 as dividend income from mutual fund units.
    • ₹2,00,000 as interest income from bonds.
  • All income is received in USD in his offshore account.
• Tax Treatment:
  • The total income of ₹6,50,000 (₹3,00,000 capital gains + ₹1,50,000 dividends + ₹2,00,000 interest) is exempt under Section 10(4G) because:
    • Mr. John is a non-resident.
    • The income is from a portfolio of securities/financial products managed by a portfolio manager in an IFSC.
    • The income is received in foreign currency in an offshore banking unit account.
  • If Mr. John were a resident, this income would be taxable under the heads “Capital Gains” or “Income from Other Sources,” depending on the nature of the income.

Scenario 2:

• Facts:
  • Ms. Li, a non-resident in Hong Kong, invests in a portfolio of derivatives and ETFs through a portfolio manager in GIFT City’s IFSC.
  • In FY 2024-25, she earns ₹4,00,000 from the settlement of derivative contracts (financial products).
  • Later in the year, Ms. Li becomes a resident in India due to her stay exceeding 182 days.
• Tax Treatment:
  • The ₹4,00,000 earned while Ms. Li was a non-resident is exempt under Section 10(4G), provided it was received in foreign currency and managed by an IFSC portfolio manager.
  • Any income earned after she becomes a resident is not exempt and will be taxable under the relevant provisions (e.g., “Capital Gains” or “Income from Other Sources”).