Rule 126: IFSC finance-company conditions for section 177
Rule 126 sets the conditions for the specified IFSC finance-company provision in section 177. It limits the company to the listed activities and requires the relevant interest on non-resident debt to be paid in foreign currency.
Official notified Income-tax Rules, 2026Need advice on Rule 126?
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Bare law
Rule 126 - Conditions and activities for finance company located in any International Financial Services Centre for section 177
(1) For the purposes of section 177(7)(b), the finance company located in any International Financial Services Centre shall only carry out one or more of the following activities, namely: — (a) lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, or financial lease; or (b) factoring and forfaiting of receivables; or (c) functions of Global or Regional Corporate Treasury Centre such as borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other such treasury services and activities.
(2) The interest being paid by such finance company, being the borrower, in respect of any debt issued by a non-resident, shall be in foreign currency.
(3) For the purposes of this rule, — (a) ―finance company‖ means a finance company as defined in regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019); and (b) ―International Financial Services Centre‖ shall have the meaning as assigned to it in section 2(q) of the Special Economic Zones Act, 2005 (28 of 2005).
Rule breakdown
Confirm the regulated entity and location
The company must fit the finance-company definition in the IFSCA Finance Company Regulations, 2021 and be located in an IFSC within the stated SEZ Act definition.
Do not treat every company with an IFSC address as satisfying the regulated finance-company definition.
Activities are limited to the listed categories
The rule permits lending through loans, commitments, guarantees, credit enhancement, securitisation or financial lease; factoring and forfaiting; and the listed global or regional corporate-treasury functions.
The treasury examples include borrowing, lending, currency or commodity hedging, investments, cash management, structured credit, intra-group financing and financial budgeting. Review the actual business mix against the only-carry-out requirement.
Interest on the relevant debt must be in foreign currency
The finance company as borrower must pay the interest in foreign currency on debt issued by a non-resident as described in sub-rule (2).
Keep the debt agreement, counterparty status and payment-currency evidence. A foreign-currency accounting entry alone should not be assumed to establish how interest was paid.
Apply the condition within the parent section
This rule supplies conditions for section 177(7)(b); it is not a general exemption from every tax or regulatory requirement.
Review the parent provision, the regulated activity and financing facts together before taking a filing position.
Key takeaways
Regulated definition matters
Confirm both finance-company status and IFSC location.
Only listed activities
Review the full business activity mix.
Foreign-currency interest
Retain debt and actual payment evidence.
Practical checklist
- Verify regulated status and location.
- Map all activities to the permitted categories.
- Keep foreign-currency interest-payment evidence.
Avoid
- Do not rely on the IFSC address alone.
- Do not extend a parent-section condition into a general tax exemption.
FAQs
Does every IFSC company satisfy this rule?
No. The specified finance-company definition and activity and interest conditions must be met.
Are factoring and forfaiting included?
Yes. Clause (1)(b) expressly includes them.
Does this rule exempt the company from all tax rules?
No. It supplies conditions for the identified section 177 provision.
Glossary
- IFSC finance company
- The finance company within the regulatory definition and IFSC location specified by the rule.