Specified Fund Exemption and FPI Tax Rates

This regime sits at Sections 10(4D) and 115AD of the Income tax Act, 1961, and at Schedule VI and Section 210 of the Income tax Act, 2025, which governs from Tax Year 2026-27. Rates below follow Section 210. This article is for general information and does not constitute tax advice.

What a “specified fund” is, and what it gets

Three kinds of vehicle qualify: a Category III AIF located in the IFSC meeting conditions on non-resident unit-holding, a Retail Scheme or Exchange Traded Fund registered under the applicable IFSC regulations, and the investment division of an offshore banking unit.

The exemption covers income from transferring a capital asset, but only where both conditions hold together: the transfer happens on a recognised stock exchange located in the IFSC, and the consideration is paid in convertible foreign exchange. It also covers income from securities issued by a non-resident where that income doesn’t otherwise accrue in India and the issuer isn’t a permanent establishment here, and securitisation trust income chargeable as business profits, to the extent attributable to non-resident unit holders.

Miss either condition and the specific exemption for that transaction is unavailable. The fund doesn’t lose everything, though; it falls back to the Section 210 rate structure below, which is itself concessional.

The rate table

Income	FPI	Specified fund
Income in respect of securities	20%	10%
Short-term capital gains, other than on STT-paid listed equity	30%	30%
Short-term capital gains on STT-paid listed equity and equity-oriented funds	20%	20%
Long-term capital gains on other securities	12.5%	12.5%
Long-term capital gains on STT-paid listed equity, above ₹1,25,000	12.5%	12.5%
Any remaining total income	Rates in force	Rates in force

One figure worth checking against older material. Long-term gains on securities outside the STT-paid listed equity basket are at 12.5% under Section 210. Commentary written around the 1961 Act still shows 10% for this limb in places. If you are working on a year before Tax Year 2026-27, check which rate applied to that year rather than assuming continuity in either direction.

The 10% versus 20% split on securities income is the deliberate concession that makes an IFSC-based specified fund cheaper to run than the same activity through an ordinary FPI. On capital gains the two are treated alike. Separately, the higher 25% and 37% surcharge slabs don’t apply to this dividend and capital gains income, so the effective surcharge is capped at 15% even for an AOP or BOI structure.

New: Government securities are exempt for an FII

The Taxation and Other Laws (Amendment) Act, 2026, which received assent on 17 August 2026 and applies from 1 April 2026, inserted two new exemptions into Schedule IV of the Income tax Act, 2025. For a Foreign Institutional Investor, both interest on a Government security and any capital gains on its sale, exchange or transfer are exempt. A parallel entry gives the same exemption to the Bank for International Settlements.

This is a material change for anyone running an India fixed-income book. Interest that would otherwise have been taxed at 20% and gains that would otherwise have fallen in the table above come out of charge altogether, which changes the after-tax yield on the sovereign curve rather than merely simplifying compliance. “Government security” takes its meaning from the Government Securities Act, 2006.

Two limits worth reading carefully before relying on it. First, the exemption is conditional on furnishing information in the prescribed form and manner, so it is not self-executing; until the form is notified and filed, the position should be treated as claimable rather than automatic. Second, and more easily missed, the entry is written for a Foreign Institutional Investor, not for a specified fund. Section 210 applies to both categories side by side, but this Schedule IV exemption names only the former. A Category III IFSC fund holding Government securities should not assume the exemption reaches it simply because it sits within the same rate provision.

The rule that decides how much of this you actually get

This is the part that gets least attention and matters most. For a specified fund, Section 210(2) applies the concessional regime only to the extent of income attributable to units held by non-residents, and specifically not to a non-resident’s permanent establishment in India. That attribution is calculated in the prescribed manner, based on unit-holding through the year rather than a snapshot.

The practical consequence is that a specified fund runs two tax positions at once. The non-resident-attributable slice sits in the table above. The balance, attributable to resident unit holders, falls outside this regime and is taxed under the ordinary rules applying to the fund’s legal form. A fund that thinks of itself as having a single tax rate has misunderstood the structure.

Because the attribution is a prescribed annual computation supported by certification, the compliance burden is not optional decoration: it is what evidences the exemption. A fund that lets the certification slip is not exposed to a penalty so much as to losing the benefit for that year, which is a far larger number. Where the specified fund is the investment division of an offshore banking unit, Section 210(3) runs the same logic against income attributable to that division in its capacity as a Category-I portfolio investor under the SEBI FPI Regulations, 2019.

What you can and cannot deduct

The position is more nuanced than “no deductions available”, and the distinction is worth getting right:

• Where gross total income consists only of securities income at the first row of the table, no deduction is allowed for expenses, nor under the deductions chapter. That income is taxed gross.
• Where gross total income includes income from any row of the table alongside other income, the special-rate income is stripped out first, and chapter deductions are then allowed as if the reduced figure were the whole gross total income.

So deductions are not switched off wholesale; they are ring-fenced away from the concessionally taxed income and remain available against the rest. Separately, the foreign-currency computation that would otherwise neutralise rupee depreciation does not apply to capital gains on these securities, so gains are computed in rupees without that relief.

A specified fund is also outside alternate minimum tax entirely, and an IFSC unit claiming the tax holiday keeps that claim available despite the general restriction, as set out in Section 80LA Tax Holiday.