Budget 2024: Tax exemption deadline extended by one year for these categories

The interim budget has maintained the existing tax rates while extending income tax benefits by a year in three significant areas: startups, Indian branches of foreign banks located in GIFT City (Gandhinagar, Gujarat), and sovereign funds as well as foreign pension funds.

Startups

The tax exemption under Section 80-IAC has been extended until March 31, 2025, with a one-year extension. 

Startups that have had a turnover of less than ₹100 crore in any of the preceding financial years qualify for a three-year tax holiday at any point within the initial ten years of their establishment. To be eligible, the startup must be registered as a private limited company or a partnership firm, or a limited liability partnership. Additionally, it should be actively engaged in innovation, development, or enhancement of products, processes, or services. Alternatively, it should demonstrate a scalable business model with significant potential for employment generation or wealth creation. Importantly, the startup should not have been formed by dividing or reconstructing an existing business.

Startups that were established on or before March 31, 2023, were entitled to a three-year tax holiday under Section 80-IAC of the Income Tax Act, 1961. The deadline for incorporation has now been extended by one year. Consequently, startups incorporated on or before March 31, 2025, are now eligible for this benefit. This extension creates a one-year opportunity for recently formed startups to take advantage of the tax relief, potentially fostering additional entrepreneurship and business development within the specified timeframe.

IFSCs

Tax exemption for International Financial Services Centre units under Sections 10(4D) and 10(4F) has been prolonged by one year, now applicable until March 31, 2025.

The role of the International Financial Services Centres Authority (IFSCA) is pivotal in the advancement of GIFT City as a prominent global financial hub. Established in 2020, IFSCA serves as the consolidated regulator for financial entities operating within GIFT City in Gandhinagar, Gujarat. Noteworthy tax benefits are extended to entities within the IFSC, including:

Derivative contracts issued by Foreign Portfolio Investors (FPIs) within GIFT City and overseen by the IFSCA are officially acknowledged as valid legal contracts. This legalization essentially permits the use of specific financial instruments, such as Participatory Notes (P-notes), allowing foreign investors to indirectly access Indian securities. The Indian branches of foreign banks situated in GIFT City are now authorized to utilize these Offshore Derivative Contracts (ODCs) for investments in the Indian stock market.

Entities in GIFT City qualify for a ten-year tax exemption out of a total of fifteen consecutive years. In the previous year’s budget, the period allowed for transferring funds from other countries into GIFT City was prolonged by two years. This time, it has been extended even further.

An equivalent one-year extension has been granted to airline leasing finance companies intending to relocate their base to GIFT City.

Sovereign wealth funds and pension funds

Tax exemption for Sovereign Wealth Funds and Pension Funds under Section 10(23FE) has been prolonged by one year, now applicable until March 31, 2025.

Sovereign wealth funds and pension funds (specified funds) are eligible for a tax exemption on the interests, profits, and dividends earned by their units in GIFT City from investments made between April 2020 and March 2024.

The tax exemption offered to sovereign wealth funds and pension funds in GIFT City serves as a compelling incentive to attract foreign investment. This tax relief has the potential to enhance GIFT City’s appeal to these funds, fostering greater foreign investment in India. This, in turn, can contribute to the growth of GIFT City as a global financial hub, positively impacting the Indian economy by promoting job creation and infrastructure development.