As global banks, broker-dealers, and capital markets players increasingly consider India as a potential offshore financial base, Deloitte has called upon the government to utilize Budget 2026 to implement crucial reforms. The consulting giant emphasizes the need for parity rules among financial entities, the elimination of tax asymmetries, and the reduction of compliance frictions that currently hinder the expansion of IFSC GIFT City into a comprehensive international banking, financial services, and insurance (BFSI) hub.
IFSC GIFT City: A Focal Point of India's Economic Ambitions
According to Deloitte, the International Financial Services Centre (IFSC) at GIFT City has become a central element of India's economic strategy in banking, capital markets, insurance, and related financial services. The International Financial Services Centres Authority (IFSCA) is responsible for transforming IFSCs into diverse, globally competitive hubs that serve both India and the broader regional financial ecosystem.
Deloitte highlights that achieving this objective depends on fostering a pro-business environment supported by a progressive regulatory framework, advanced technology and infrastructure, and a robust pool of skilled financial professionals.
Key Recommendations for Budget 2026
Vijay Mani, Partner and Banking & Capital Markets Leader at Deloitte India, stated, "To further enhance IFSC GIFT City's stature as a premier international financial services hub, certain tax and regulatory refinements may be considered in the Budget." The recommendations focus on several critical areas to attract global financial institutions and boost competitiveness.
Parity for Broker-Dealers and Finance Companies
One of the primary suggestions is to provide broker-dealers and finance companies operating from IFSC GIFT City with the same tax treatment as International Banking Units (IBUs) established by foreign banks. While the IFSCA already allows IBUs and SEBI-registered Foreign Portfolio Investors (FPIs) in GIFT City to issue Offshore Derivative Instruments (ODIs) and over-the-counter (OTC) derivatives with Indian underlying securities, the income-tax law currently offers broader exemptions to IBUs compared to non-bank entities.
Although the Income-tax Act was amended in 2025 to exempt non-resident investors from tax on income earned from ODIs and OTCs issued by non-bank entities from GIFT City, Deloitte points out that capital gains exemptions remain limited to the investment divisions of IBUs of foreign banks.
"The Income-tax law does not confer a similar tax treatment to broker-dealers and finance companies that operate from IFSC GIFT City," Deloitte noted, advocating for equal capital gains tax exemptions for such entities. This move, they argue, would help bring offshore access products markets onshore to India, enhancing the hub's appeal.
GAAR Exemption to Boost Tax Certainty
Deloitte has also proposed an exemption from India's General Anti-Avoidance Rules (GAAR) for IFSC units and transactions involving them. Citing the OECD's BEPS Action Plan 5 on harmful tax practices, Deloitte emphasized that IFSC units are already required to demonstrate significant economic substance, including physical offices, employees, and regulated operations under IFSCA oversight.
"In this context, and to provide tax certainty while attracting more businesses to IFSC–GIFT City, an exemption from the applicability of Indian GAAR provisions should be granted," Deloitte recommended. This exemption would cover both IFSC units and arrangements entered into with them, fostering a more predictable tax environment.
Relief from Transfer Pricing Disputes
Another significant concern raised relates to section 92C(4) of the Income-tax Act, which denies IFSC units the benefit of the 100 percent income-tax holiday under section 80LA on income enhanced through transfer pricing adjustments. Deloitte warned that this provision could lead to unnecessary litigation and undermine global confidence in the tax certainty offered to IFSC units.
Russell Gaitonde, Partner at Deloitte India, explained, "This creates an impression that even if an IFSC unit is entitled to a 100 percent income-tax holiday, it may still be required to pay taxes in India due to transfer pricing adjustments." He added that exempting IFSC units from section 92C(4) would strengthen India's credibility as a reliable financial hub.
Removing TDS on Payments to IFSC Units
Deloitte has further recommended eliminating tax deduction at source (TDS) on all payments made to IFSC units eligible for the 10-year, 100 percent tax deduction under section 80LA. While a CBDT notification issued in March 2024 already provides TDS exemption for certain specified payments, extending this relief to all payments would significantly reduce compliance burdens and improve ease of doing business.
"Considering that the income of IFSC units is not taxable, all payments made to units in IFSC on which section 80LA deduction is available should be exempted from TDS," Deloitte stated. They suggested that reporting safeguards could continue to ensure regulatory oversight, balancing relief with accountability.
This recommendation is particularly relevant for foreign banks operating IBUs in GIFT City, regardless of whether they have obtained nil withholding tax orders under section 195(3).
Conclusion: Enhancing Global Competitiveness
Deloitte asserts that implementing these measures in Budget 2026 would enhance tax certainty, attract global financial institutions, and position IFSC GIFT City as a competitive alternative to established offshore financial centres. By addressing tax asymmetries and compliance frictions, India can leverage its economic ambitions and solidify GIFT City's role as a full-service international BFSI hub, driving growth and innovation in the financial sector.
