Clause 27 of the Finance Bill, 2026 proposes amendments to section 2 of the Income-tax Act, 2025, specifically to clause (40) defining the expression “dividend.” The amendment focuses on rationalising the exclusion of certain inter-group loans and advances from the dividend definition, particularly in the context of treasury and finance structures operating through International Financial Services Centres (IFSCs). The objective is not to expand the exclusion, but to tighten and clarify its scope by:
- prescribing location-based conditions for group entities,
- shifting notification power to the Central Government, and
- introducing statutory definitions aligned with the IFSC regulatory framework.
The amendments take effect from 1 April 2026 and apply from tax year 2026-27 onwards.
Existing Position under the Income-tax Act, 2025
Under the existing section 2(40)(v). an advance or loan between two group entities is excluded from the definition of dividend where:
- One group entity is a finance company or finance unit, and
- The parent entity or principal entity of the group is listed on a stock exchange outside India, other than countries or territories excluded by the Board.
Notably:
- The location of the other group entity was not explicitly restricted, and
- The Act did not define group entity or parent/ principal entity.
What Clause 27 Changes
Clause 27 does not alter the basic structure of the exclusion, but conditions its availability more precisely.
1. Location Requirement for the Other Group Entity
Revised Condition
The dividend exclusion will apply only if:
- The other group entity involved in the loan or advance is also located outside India, and
- Such country or territory is a notified jurisdiction.
This is in addition to the existing requirement that:
- One entity is a finance company or finance unit, and
- The parent or principal entity is listed outside India.
Implications
- Excludes India-resident group entities from the benefit
- Limits the exclusion to genuine cross-border treasury arrangements
- Reduces scope for structuring inter-company loans through domestic entities
2. Notification Power Vested in the Central Government
What Changes
- The power to specify the eligible foreign country or territory is expressly vested in the Central Government, and
- Such specification must be made by notification in the Official Gazette.
This replaces the earlier reference to specification by the Board.
Implications
- Enhances legislative certainty and transparency
- Ensures uniform application of the provision
- Reduces administrative discretion and interpretational disputes
3. Statutory Definition of “Group Entity” Introduced
Clause 27 introduces a definition of “group entity” by adopting the meaning assigned to “group entities” under Regulation 2(1)(m) of the IFSCA (Payment Services) Regulations, 2024, issued under the International Financial Services Centres Authority Act, 2019.
Implications
- Aligns tax law with IFSC regulatory definitions
- Avoids multiple or inconsistent meanings of “group”
- Strengthens coherence between tax and financial regulation
4. Definition of “Parent Entity”/ “Principal Entity” Clarified
A parent entity or principal entity, in relation to group entities, is defined as an entity which:
- Has other group entities as subsidiaries, and
- Either:
- controls more than 50% of total voting power, directly or together with subsidiaries; or
- controls the composition of the Board of Directors.
Implications
- Introduces an objective control-based test
- Aligns with established corporate governance principles
- Reduces ambiguity in applying the dividend exclusion
Summary of Changes
Dividend Exclusion for Inter-group Loans: Before vs After
| Aspect | Earlier Position | Position from 1 April 2026 |
| Eligible transaction | Loan/advance between group entities | Same |
| Finance entity requirement | One entity must be finance company/unit | Same |
| Location of other group entity | Not specified | Must be outside India |
| Jurisdiction | Outside India (Board-specified) | Outside India in CG-notified jurisdiction |
| Parent/principal entity listing | Outside India | Outside India (CG-notified jurisdiction) |
| Definition of group entity | Not defined | IFSCA Regulations adopted |
| Definition of parent entity | Not defined | Control-based statutory definition |
Policy Intent
- Preserve dividend exclusion for legitimate IFSC-based treasury operations,
- Prevent over-broad or domestic use of the exclusion, and
- Provide certainty through precise statutory definitions and notifications.
The change is clarificatory and rationalising, not concessional.
What the Amendment Does and Does Not Do
What It Does
- Tightens conditions for dividend exclusion
- Introduces definitional clarity
- Aligns tax law with IFSC regulatory framework
What It Does Not Do
- ❌ Does not create a new exemption
- ❌ Does not apply to domestic treasury structures
- ❌ Does not alter dividend tax rates or charging provisions
Effective Date
✔ 1 April 2026
✔ Applicable from tax year 2026-27 onwards
Conclusion
Clause 27 of the Finance Bill, 2026 represents a measured refinement of the dividend definition for inter-group loans involving IFSC treasury and finance units. By narrowing the exclusion to notified cross-border group structures and embedding clear statutory definitions, the amendment strengthens tax certainty while safeguarding against unintended use.
The provision continues to support genuine global treasury operations, but within a clearly defined and controlled framework.
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