Budget 2026: Key highlights for units in the International Financial Services Centre ecosystem

The government has enhanced the incentive framework for units operating in IFSC.

1. The tax holiday, earlier capped at ten consecutive years within a 15-year window, is now being extended to a generous 20 consecutive years within a 25-year period.
2. Once the tax holiday finally ends, IFSC units will not revert to standard tax rates. Instead, they will enjoy a concessional base tax rate of 15%, a marked reduction from the earlier base rate of 30% (trusts) or 22% (companies).

The government has significantly strengthened the incentive framework for units operating in the IFSC, reinforcing policy certainty and long-term visibility for fund structures. This policy shift is expected to support the continued global competitiveness of IFSC-domiciled funds while fostering sustained growth of the IFSC ecosystem. Over time, these reforms could catalyse a gradual shift of substantive fund management and investment activities to the Indian IFSC.

These amendments will take effect from 1 April 2026 and will apply from the tax year 2026-27 onwards.

Individual Persons Resident Outside India (PROI) are now permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme (PIS), with the investment limit increased from 5% to 10%. The aggregate investment limit for all individual PROIs investing in listed companies has also been significantly increased from 10% to 24%. This is a welcome change as it materially expands the foreign capital pool available to Indian markets.

The Securities Transaction Tax (STT) rates have been revised upward for certain derivative transactions entered on or after 1 April 2026, as outlined below:

The hike in STT will significantly impact investors including Foreign Portfolio Investors and Category III Alternative Investment Funds (AIF), particularly those engaging in high-frequency trades in futures and options. Higher transaction costs can compress net internal rates of return (IRR), i.e., the post-cost returns generated on deployed capital, as frequent trading amplifies the cumulative impact of STT. This in turn may compel managers to recalibrate trade volumes, holding periods, and derivatives positions to maintain overall portfolio profitability.

The Bill proposes to align the definition of “specified fund” with the definition in the erstwhile Income-tax Act, 1961, under which a specified fund is a Category III AIF where all unitholders are non-residents, except the sponsor and manager. This proposed alignment does not impact AIFs operating in IFSC.

The definition of “specified fund” under the Income-tax Act, 2025, allowed income to be excluded from total income only if Offshore Banking Units (OBU) had commenced operations before 31 March 2025. The Bill extends this cut-off date to 31 March 2030. This change aligns the position with the Income-tax Act, 1961 and ensures continuity of tax benefits for the OBUs.

These amendments will take effect from 1 April 2026 and will apply to the tax year 2026-27 and onwards.