Section 10(4H)-Income of a Non-Resident or a Unit of an International Financial Services Centre (IFSC)

Section 10(4H) of the Income Tax Act, 1961 in India provides an exemption for certain income earned by a non-resident or a unit of an International Financial Services Centre (IFSC) from the transfer of ship or aircraft on a recognized stock exchange located in an IFSC, where the consideration is paid or payable in foreign currency. This provision, introduced to promote financial activities in IFSCs like GIFT City, Gujarat, aims to attract non-resident investors and IFSC-based entities by offering tax benefits on specific transactions.

Provisions of Section 10(4H)

Exemption:

• • Any income earned by a non-resident or a unit of an IFSC from:
  • The transfer of a ship or aircraft on a recognized stock exchange located 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) or a unit (e.g., a company, fund, or banking unit) established in an IFSC, regulated by the International Financial Services Centres Authority (IFSCA).
  • The income must arise from the transfer (e.g., sale or disposal) of a ship (e.g., cargo vessels, tankers) or an aircraft (e.g., commercial airplanes, helicopters).
  • The transfer must occur on a recognized stock exchange in an IFSC, such as the India International Exchange (IFSC Exchange) or NSE IFSC in GIFT City.
  • The consideration for the transfer must be paid or payable in foreign currency (e.g., USD, EUR) as per the Foreign Exchange Management Act (FEMA) regulations.
  • The transaction must comply with IFSCA and other applicable regulations.

Scope of Exemption:

• • Primarily covers capital gains (short-term or long-term) arising from the transfer of a ship or aircraft.
  • Does not cover other types of income, such as lease rentals, interest, or operational income from the ship or aircraft, unless separately exempt (e.g., under Section 10(4F) for aircraft lease royalty/interest).
  • The exemption applies to income earned by non-residents or IFSC units, ensuring tax benefits for foreign investors and IFSC-based entities.

Example of Section 10(4H)

Scenario 1 (Non-Resident):

• Facts:
  • SkyGlobal Ltd., a non-resident company based in Singapore, sells an aircraft (a commercial jet) on the India International Exchange in GIFT City (IFSC) in FY 2024-25.
  • The sale consideration is $10,00,000 (paid in USD), and the transaction results in a capital gain of ₹2,00,00,000.
• Tax Treatment:
  • The capital gain of ₹2,00,00,000 is exempt under Section 10(4H) because:
    • SkyGlobal Ltd. is a non-resident.
    • The income arises from the transfer of an aircraft.
    • The transfer occurs on a recognized stock exchange in an IFSC.
    • The consideration is paid in foreign currency.
  • If SkyGlobal Ltd. earns lease rentals from the aircraft before the sale, those rentals are not exempt under Section 10(4H) but may qualify for exemption under Section 10(4F) if applicable.

Scenario 2 (IFSC Unit):

• Facts:
  • OceanFund Ltd., a unit (company) established in GIFT City’s IFSC and regulated by the IFSCA, sells a cargo ship on the NSE IFSC in FY 2024-25.
  • The sale consideration is $5,00,000 (in USD), resulting in a capital gain of ₹1,50,00,000.
• Tax Treatment:
  • The capital gain of ₹1,50,00,000 is exempt under Section 10(4H) because:
    • OceanFund Ltd. is a unit of an IFSC.
    • The income arises from the transfer of a ship.
    • The transfer occurs on a recognized stock exchange in an IFSC.
    • The consideration is paid in foreign currency.
  • If OceanFund Ltd. were not an IFSC unit (e.g., a regular Indian company), the exemption would not apply, and the gain would be taxable under the head “Capital Gains.”

Scenario 3 (Resident):

• Facts:
  • An Indian resident company, Bharat Airways, sells an aircraft on the IFSC Exchange in GIFT City, earning a capital gain of ₹1,00,00,000 in USD.
• Tax Treatment:
  • The capital gain of ₹1,00,00,000 is not exempt under Section 10(4H) because Bharat Airways is a resident entity, not a non-resident or an IFSC unit.
  • The gain is taxable under the head “Capital Gains” as per applicable rates (e.g., 20% for long-term capital gains on unlisted assets, plus surcharge and cess).