CBDT Amends Rule 21AK to Include FPIs and OTC Derivatives
Rule 21AK amendment is now notified by the CBDT via the Income-tax (Twentieth Amendment) Rules, 2025. It expands the scope of tax exemptions for foreign investors by recognising Foreign Portfolio Investors (FPIs) and certain Over-the-Counter (OTC) derivatives. This change impacts non-resident taxation for AY 2025–26 onwards.
Let’s decode the amendment in simple terms.
What Is Rule 21AK?
Rule 21AK under the Income-tax Rules, 1962 defines “securities” and “investments” for the purpose of applying exemption under Section 10(4D).
Section 10(4D) provides that income earned by specified non-residents from specified funds (like Category I and II AIFs in IFSCs) is exempt from tax, subject to prescribed conditions.
Until now, the rule didn’t specifically include OTC derivatives or designate FPIs as qualified investors. This created ambiguity in the exemption scope.
Key Amendments in Twentieth Amendment Rules, 2025
CBDT Notification: [Twentieth Amendment Rules, 2025 – Dated 29 July 2025]
Recognition of FPIs as Eligible Investors
- New clause added to include Foreign Portfolio Investors registered with SEBI as eligible non-resident investors.
- These FPIs can now enjoy the benefit of tax exemption under Section 10(4D), if other conditions are satisfied.
Inclusion of OTC Derivatives
- The definition of “securities” under Rule 21AK is expanded to include:
- OTC derivatives permitted by relevant regulators.
- This applies to trades executed on IFSC exchanges or through authorised dealers.
What Does This Mean for FPIs?
Expanded Tax Exemption Scope
FPIs trading in:
- Debt or equity in IFSC-listed companies,
- Interest rate swaps or currency forwards,
- Other permitted OTC derivatives
…may now qualify for tax exemption under Section 10(4D, if routed via specified funds.
Why This Matters?
| Before Amendment | After Amendment |
|---|---|
| Only certain AIF investments in IFSC exempt | FPIs in IFSC also covered |
| OTC trades lacked clarity | OTC derivatives now explicitly covered |
| Narrow interpretation of “securities” | Broader, regulator-backed definition |
This aligns tax law with SEBI’s evolving FPI framework and the IFSC’s global ambitions, ensuring India remains attractive for offshore investors.
Legal Reference & Notification Link
- 📜 Section 10(4D) – Exemption for income of non-residents via specified funds
- 🔗 CBDT Notification No. 43/2025 dated 29.07.2025 (Twentieth Amendment Rules)
Expert View: Tax Position Strengthens for IFSC Players
“This amendment closes the gap for FPIs and OTC derivatives. It shows that India is serious about regulatory clarity for global investors,” says a partner at a leading tax advisory firm.
Tip: FPIs should realign their investment structures and consult tax advisors to leverage the exemption before FY 2025–26 ends.
Final Takeaway
The Rule 21AK amendment strengthens India’s tax ecosystem in IFSC by giving formal tax recognition to FPIs and modern derivative instruments. This brings clarity, certainty, and competitiveness to India’s international financial strategy.
FAQs on Rule 21AK Amendment
Q1. What is the benefit of the Rule 21AK amendment to FPIs?
It makes FPIs eligible for tax exemption on income from specified funds under Section 10(4D).
Q2. Are OTC derivatives now tax-exempt for non-residents?
Yes, if they are executed through a recognised IFSC exchange or authorised channel and meet other conditions.
Q3. Is this applicable from AY 2025–26?
Yes, the notification takes effect immediately and applies for filings from AY 2025–26 onwards.
Explore how Efiletax can help you stay compliant and maximise tax benefits as an investor or fund manager.
👉 Contact us today
Summary
CBDT’s Twentieth Amendment Rules, 2025 update Rule 21AK to include FPIs and OTC derivatives for tax exemption under Section 10(4D). This benefits non-residents investing via IFSC funds and aligns India’s tax rules with evolving global investment practices. Read full breakdown with legal links and expert tips on Efiletax.