How Non-Resident Investors Avoid Capital Gains Tax Through IFSC: Section 47(viiab)

When foreign investors participate in Indian markets, taxation becomes a sensitive area.
The government wanted to attract global capital without penalizing investors for trading in recognised Indian platforms such as the IFSC (International Financial Services Centre).

Earlier, even legitimate offshore trades that indirectly represented Indian securities were getting taxed as “transfer of capital assets.” Section 47(viiab) was introduced to fix this — ensuring that eligible transactions by non-residents through specified stock exchanges do not trigger capital gains tax in India.

Understanding the Core Concept

Section 47 of the Income Tax Act lists situations where transfers are not regarded as transfers for capital gains purposes. Sub-clause (viiab) was added to this list through the Finance Act, 2018, specifically to address offshore derivative transactions & promote India’s International Financial Services Centres.

So, under Section 47(viiab):

“Any transfer by a shareholder, unit holder, or interest holder — being a non-resident — carried out on a recognised stock exchange located in any International Financial Services Centre (IFSC) shall not be regarded as a transfer.”

In simpler words:
If you are a non-resident investing through an IFSC exchange (like NSE IFSC or India INX), your sale of certain financial instruments won’t be treated as a taxable transfer in India.

Key Conditions for Exemption

To claim the exemption under Section 47(viiab), the following conditions must be met:

1. Transferor must be a non-resident.
   The exemption applies only when the person transferring the capital asset is a non-resident as per Section 6 of the Income Tax Act.
2. Transfer should occur on a recognised stock exchange.
   The transaction must take place on an IFSC-based exchange that is recognised by SEBI or another notified authority.
3. Consideration should be received in foreign currency.
   All trades under this section must be settled in foreign currency, ensuring they remain international in nature.
4. Eligible instruments.
   The exemption typically applies to:
   • Bonds,
   • GDRs (Global Depository Receipts),
   • Masala bonds,
   • Rupee-denominated bonds, and
   • Derivative instruments traded on IFSC exchanges.

If any of these conditions are not satisfied, the exemption under Section 47(viiab) cannot be claimed.

Also Read: The Residency Test That Decides If Your Global Income Gets Taxed

Purpose Behind Section 47(viiab)

India’s aim is simple — to build its own version of offshore financial hubs like Singapore or Dubai. By making trading in IFSC exchanges tax-efficient, the government wants to attract non-resident investors who otherwise traded in foreign markets.

Through Section 47(viiab), India ensures:

• Global investors can participate in Indian financial instruments."
• There’s no double taxation on offshore transactions.
• The country maintains transparency & a well-regulated environment for cross-border financial activities.

Practical Example

Let’s take a simple case.

A non-resident investor from Singapore sells rupee-denominated bonds of an Indian company on the NSE IFSC exchange.
The sale happens in USD, and the IFSC is located in GIFT City, Gujarat.

Under normal rules, this could have been considered a “transfer” of capital assets, leading to tax on capital gains in India.

But under Section 47(viiab) —
Since it’s a transfer by a non-resident on a recognised stock exchange & settled in foreign currency, it will not be treated as a transfer at all.

Result?
No capital gains tax in India for that investor.

Scope Expansion Over Time

Initially, Section 47(viiab) only covered bonds & GDRs. But as India’s IFSC ecosystem expanded, the government widened the scope to include:

• Derivatives, ETFs, units of mutual funds, and interest in AIFs (Alternative Investment Funds) listed in IFSC exchanges.

This step gave non-residents more instruments to trade without facing domestic tax consequences.

Now, any transfer by a shareholder, unit holder, or interest holder — if executed on a recognised IFSC stock exchange — is safely outside the definition of “transfer” for capital gains purposes.

Difference Between Section 47(vii) and Section 47(viiab)

Also Read: TDS on Property Transactions : The One Form Every Property Buyer Must File After a Purchase

Why the Clause Matters for Non-Residents

For years, foreign investors were hesitant to trade Indian instruments due to complex capital gains rules & withholding obligations.
Now, Section 47(viiab) gives them a clean, tax-neutral environment.

By ensuring that transfers of capital assets made by non-residents on recognised stock exchanges are exempt, India positions its IFSCs as safe gateways for global capital flows. It also aligns Indian tax law with international practices — removing friction between taxation & genuine investment.

Compliance & Documentation

To ensure smooth claim of exemption under Section 47(viiab), non-residents must maintain proper documentation such as:

• Proof of residency outside India.
• Contract notes from recognised IFSC exchanges.
• Confirmation of settlement in foreign currency."
• Broker confirmation of IFSC-based transaction.

Having these readily available helps avoid disputes during tax assessments or inquiries.

CBDT Clarification on Implementation

The Central Board of Direct Taxes (CBDT) issued circulars clarifying that these exemptions apply only to transactions conducted on recognised IFSC stock exchanges & not to over-the-counter (OTC) trades.

This ensures that tax-free benefits are limited to transparent, exchange-based transactions that pass through proper regulatory channels.

Illustration – Simplifying Section 47(viiab)

Also Read: Residential Status for Companies and Entities

Connection with IFSC (International Financial Services Centre)

IFSCs like GIFT City are at the core of this provision. They serve as international hubs for cross-border financial transactions.

With Section 47(viiab) in place:

• Non-resident investors can trade freely in IFSC exchanges.
• Financial institutions can list global products in India."
• The Indian economy gains credibility & liquidity without tax friction.

This not only strengthens India’s financial ecosystem but also enhances global investor confidence.

Final Thoughts

Section 47(viiab) might sound technical, but its impact is significant. It acts as a bridge between foreign investors & Indian capital markets. By ensuring that eligible transfers are not treated as taxable events, India gives global investors the confidence to participate in local financial growth stories — through globally accepted, tax-efficient routes. For any investor, fund, or corporate entity considering IFSC-based trades, understanding this clause can make a real financial difference.

If you are a foreign investor, fund manager, or startup raising offshore capital, your transaction structure determines your tax exposure. Our CA team at CallMyCA.com specializes in cross-border tax compliance, capital gain exemption analysis, and IFSC-based investment structures.