Rule 284: Exemption for non-residents on NDFs and offshore derivatives with IFSC units
Rule 284 sets conditions for exempting income of a non-resident from transfer of non-deliverable forward contracts, offshore derivative instruments or over-the-counter derivatives, or distribution of income on ODIs or OTC derivatives, under Schedule VI [Table: Sl. No. 5]. The contract must be entered into with an IFSC offshore banking unit holding IFSCA registration, or with an FPI that is an IFSC unit, and not through or on behalf of the non-resident's permanent establishment in India.
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Bare law
Rule 284 - Conditions for the purpose of Schedule VI [Table: Sl. No. 5] to the Act
(1) The income accrued or arisen to, or received by, a non-resident as a result of—
(a) transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives; or
(b) distribution of income on offshore derivative instruments or over-the-counter derivatives, under Schedule VI [Table: Sl. No. 5] of the Act, shall be exempted subject to fulfilment of the following conditions:—
(i) the non-deliverable forward contract or offshore derivative instrument or over-the-counter derivative is entered into by the non-resident with an offshore banking unit of an International Financial Services Centre, which holds a valid certificate of registration granted under International Financial Services Centers Authority (Banking) Regulations, 2020 made under the International Financial Services Centres Authority Act, 2019 (40 50 of 2019), by the International Financial Services Centres Authority or any foreign portfolio investor being a unit of an International Financial Services Centre; and
(ii) such contract, instrument or derivative is not entered into by the non-resident through or on behalf of its permanent establishment in India.
(2) The offshore banking unit or the foreign portfolio investor shall ensure that the condition provided in sub-rule (1)(ii) is complied with.
(3) For the purposes of this rule,—
(a) "derivative" shall have the same meaning as assigned to it in section 2(ac) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(b) "foreign portfolio investor" means a person registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
(c) "non-deliverable forward contract" means a contract for the difference between an exchange rate agreed before and the actual spot rate at maturity, with the spot rate being taken as the domestic rate or a market determined rate and such contract being settled with a single payment in a foreign currency;
(d) "offshore banking unit" means a banking branch Unit located in an International Financial Services Centre;
(e) "offshore derivative instrument" shall have the same meaning as assigned to it in regulation 2(1)(o) of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(f) "over-the-counter derivatives" means a derivative contract that is not traded on an exchange but instead is privately negotiated between a purchaser and a seller; and
(g) "permanent establishment" shall have the meaning assigned to it in section 173(c).
Rule breakdown
Conditions: Rule 284(1)
Counterparty: an offshore banking unit of an IFSC holding a valid certificate of registration under the IFSCA (Banking) Regulations, 2020, or an FPI that is an IFSC unit.
Not entered into through or on behalf of the non-resident's permanent establishment in India.
Responsibility: Rule 284(2)
The offshore banking unit or FPI must ensure the no-permanent-establishment condition is met.
Definitions: Rule 284(3)
Derivative, FPI, non-deliverable forward contract, offshore banking unit, offshore derivative instrument, over-the-counter derivatives and permanent establishment are defined, mostly by reference to SEBI and SCRA definitions and section 173(c).
Key takeaways
IFSC counterparty
Contract must be with an IFSC banking unit or FPI unit.
No Indian PE
Not through or on behalf of a PE in India.
Unit's duty
The IFSC unit ensures the PE condition.
Practical checklist
- Confirm the counterparty's IFSCA registration.
- Document that the contract is not booked through any Indian PE.
Avoid
- Do not route the contract through a permanent establishment in India.
FAQs
Who must the non-resident contract with?
An IFSC offshore banking unit with valid IFSCA registration, or an FPI that is an IFSC unit (Rule 284(1)(i)).
What is a non-deliverable forward contract?
A contract for the difference between an agreed exchange rate and the spot rate at maturity, settled with a single payment in foreign currency (Rule 284(3)(c)).
Who checks the permanent establishment condition?
The offshore banking unit or the FPI (Rule 284(2)).
Glossary
- Offshore banking unit
- A banking branch unit located in an IFSC (Rule 284(3)(d)).
- Over-the-counter derivative
- A derivative not traded on an exchange but privately negotiated (Rule 284(3)(f)).