The rule and where it comes from
The Reserve Bank of India made the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 under section 47 of the Foreign Exchange Management Act, 1999 (FEMA). They are Notification No. FEMA 339/2015-RB dated 2 March 2015, published in the Official Gazette on 23 March 2015 as G.S.R. 218(E). The operative rule is short. Regulation 3 provides:
"Any financial institution or branch of a financial institution set up in the IFSC and permitted/recognised as such by the Government of India or a Regulatory Authority shall be treated as a person resident outside India."
Three elements must be present:
- A financial institution or its branch. Regulation 2(b) defines the term widely: a company, firm, association of persons, body of individuals or any artificial juridical person engaged in rendering financial services or carrying out financial transactions. The explanation lists banks, non-banking financial companies, insurance companies, brokerage firms, merchant banks, investment banks, pension funds, mutual funds, trusts, exchanges and clearing houses.
- Set up in the IFSC. "IFSC" takes its meaning from section 2(q) of the Special Economic Zones Act, 2005.
- Permitted or recognised as such by the Government of India or a "Regulatory Authority". Regulation 2(i) names RBI, SEBI, IRDA, PFRDA and the Forward Markets Commission, and adds any other statutory authority empowered to regulate a financial institution under Indian law. Since the IFSCA Act, 2019, IFSCA is the regulator that grants these permissions in GIFT IFSC.
Regulations 4 and 5: currency, counterparties and other regulations
Regulation 4 controls what the unit may do once it is treated as non-resident:
"A financial institution or branch of a financial institution shall conduct such business in such foreign currency and with such persons, whether resident or otherwise, as the concerned Regulatory Authority may determine."
The currency of business and the range of permitted customers, including residents in India, are therefore set by the regulator's framework for each activity, not by FEMA directly. Any rupee dealing needs an express permission. See where rupees can and cannot be used.
Regulation 5 provides that, subject to section 1(3) of the Act, and save as otherwise provided in these Regulations or any other Regulations or directed by RBI, nothing in any other regulations applies to a financial institution or branch set up in an IFSC. It speaks of "regulations". Rules made by the Central Government under FEMA, such as the Overseas Investment Rules, 2022 and the Non-Debt Instruments Rules, 2019, are separate instruments and should be read on their own terms.
What follows in practice
- Dealings with India are cross-border. A payment between a resident in India and an IFSC unit is a transaction with a person resident outside India, and is tested under FEMA in the same way as a dealing with an overseas counterparty.
- Residents investing in IFSC entities make overseas investments. The Overseas Investment Rules, 2022 define a "foreign entity" to include one in an IFSC (rule 2(1)(h)), and Schedule V sets out how residents invest there. See Indian groups setting up IFSC units and resident individuals and the LRS.
- IFSC lenders are recognised ECB lenders. Since 16 February 2026 a financial institution or branch of one set up in an IFSC is named as a recognised lender in the external commercial borrowing framework. See lending from the IFSC to India.
- The unit's own investments abroad. Under rule 4(a) of the Overseas Investment Rules, 2022, nothing in those Rules or the related Regulations applies to any investment made outside India by a financial institution in an IFSC.
- Rupee account in India. An IFSC unit may open a Special Non-Resident Rupee (SNRR) account with an authorised dealer in India outside the IFSC. Since an amendment to the FEMA (Deposit) Regulations notified on 14 January 2025, that account may be used for all business-related transactions of the unit, as IFSCA's circular of 29 January 2025 explains.
What the rule does not do
- It is not a tax rule. An IFSC unit incorporated in India remains an Indian company for income tax. Its relief comes from the Income-tax Act, 2025, chiefly the section 147 deduction.
- It does not displace company law, SEZ law or the anti-money laundering regime. The unit is still incorporated or registered in India, operates in a special economic zone and is a reporting entity for AML purposes. See AML, CFT and KYC obligations.
- It attaches to the IFSC entity, not the group. An Indian parent and its onshore affiliates stay resident. Capital, loans and service fees between them and the IFSC unit are cross-border flows, each needing its own FEMA route.
- It is drafted for financial institutions. A unit whose activity is not financial services should confirm its FEMA position for that activity rather than assume regulation 3 applies.
A practical habit: for every flow into or out of the IFSC unit, write down who is resident and who is not, the currency, and the FEMA route that permits it. It makes gaps visible before money moves.