Section 115JG: Conversion of a Foreign Bank's Indian Branch into an Indian Subsidiary
Section 115JG of the Income-tax Act, 1961 provides a conditional tax framework for converting an Indian branch of a foreign bank into its Indian subsidiary. From 1 April 2026, the corresponding provision is Section 219 of the Income-tax Act, 2025.
What is Section 115JG?
Section 115JG forms part of Chapter XII-BB of the Income-tax Act, 1961, titled Special provisions relating to conversion of Indian branch of a foreign bank into a subsidiary company. It was inserted by the Finance Act, 2012 with effect from 1 April 2013.
The provision recognises that a foreign bank may restructure its Indian branch operations into a subsidiary incorporated in India. It addresses potential tax consequences of transferring business assets, liabilities and related tax attributes as part of that conversion.
Who can use the provision?
- A foreign company engaged in banking in India through an Indian branch.
- The branch must convert into an Indian subsidiary company under the applicable RBI scheme.
- The conversion must meet the Central Government's notified conditions.
A routine transfer of assets to an unrelated company or a restructuring outside the RBI scheme does not qualify merely because it involves a foreign company.
Tax treatment under Section 115JG(1)
1. Capital gains on conversion
Under Section 115JG(1)(i), capital gains arising from a qualifying conversion are not chargeable to tax in the assessment year corresponding to the previous year in which the conversion takes place, subject to the statutory conditions.
2. Losses, depreciation, tax credit and computation
Section 115JG(1)(ii) permits notified exceptions, modifications and adaptations concerning unabsorbed depreciation; the set-off and carry-forward of losses; tax credit for tax paid on deemed income; and the computation of income of the foreign company and its Indian subsidiary.
This does not mean every loss or credit transfers automatically. The applicable notification and RBI scheme determine the treatment and continuing obligations.
What happens if conversion conditions are breached?
Section 115JG(2): If the bank or subsidiary fails to satisfy conditions in the RBI scheme or Central Government notification, the Act applies without the special benefits, exemptions or relief under Section 115JG(1).
Section 115JG(3): Where relief was already granted and a subsequent failure occurs, the relief is treated as wrongly allowed. The Assessing Officer may recompute income and amend the relevant assessment.
Under the 1961 Act, the rectification mechanism refers to Section 154; the four-year period is reckoned from the end of the previous year in which the non-compliance occurs, rather than simply from the original assessment year. Section 115JG(4) requires notifications to be laid before both Houses of Parliament.
Current law from 1 April 2026: Section 219 of the Income-tax Act, 2025
The Income-tax Act, 2025 uses Section 219 for the same subject. It continues the conditional non-chargeability of capital gains on an RBI-scheme conversion and the notification-based treatment of losses, depreciation, credits and income computation.
| Issue | 1961 Act: Section 115JG | 2025 Act: Section 219 |
|---|---|---|
| Applicable period | Relevant earlier assessment years | Tax years beginning 1 April 2026 onward |
| Conversion relief | Section 115JG(1)(i) | Section 219(1)(a) |
| Tax attribute treatment | Section 115JG(1)(ii) | Section 219(1)(b) |
| Loss of relief | Section 115JG(2)-(3) | Section 219(2)-(3) |
| Rectification reference | Section 154(7) | Section 287(8) |
| Notification laid before Parliament | Section 115JG(4) | Section 219(4) |
Section 219(3)(c) applies the relevant four-year reckoning rule by reference to the end of the tax year in which a condition is breached. For older transactions, the applicable 1961 Act provisions and transitional rules must still be considered.
Practical example
Suppose a foreign bank operates in India through a branch and transfers the Indian banking business to a wholly owned Indian subsidiary under an RBI-approved conversion scheme. If the conversion satisfies the applicable notified conditions, capital gains arising from that conversion may receive the statutory relief. The treatment of accumulated business losses, depreciation and relevant tax credits must be determined under the applicable notification.
If a required condition is later violated, relief already granted may be withdrawn and the earlier income recomputed under the relevant statutory procedure.
Compliance checklist
- Identify the RBI scheme governing the conversion and document compliance with it.
- Locate and review the Central Government notification applicable to the transaction.
- Reconcile assets, liabilities, depreciation, losses and tax-credit balances of the branch and subsidiary.
- Retain conversion approvals, valuation documents, accounting records and tax computations.
- Monitor ongoing conditions after conversion, including conditions that could trigger withdrawal of relief.
Section 115JG: Statutory text and amendment note (1961 Act)
The following historical text and amendment note are retained from the original webpage for reference. The applicable law for current tax years is discussed above.
Read the original Section 115JG text and amendment history
1(1) Where a foreign company is engaged in the business of banking in India through its branch situate in India and such branch is converted into a subsidiary company thereof, being an Indian company (hereafter referred to as an Indian subsidiary company) in accordance with the scheme framed by the Reserve Bank of India, then, notwithstanding anything contained in the Act and subject to the conditions as may be notified by the Central Government in this behalf,-
(i) the capital gains arising from such conversion shall not be chargeable to tax in the assessment year relevant to the previous year in which such conversion takes place;
(ii) the provisions of this Act relating to treatment of unabsorbed depreciation, set off or carry forward and set off of losses, tax credit in respect of tax paid on deemed income relating to certain companies and the computation of income in the case of the foreign company and Indian subsidiary company shall apply with such exceptions, modifications and adaptations as may be specified in that notification.
(2) In case of failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), all the provisions of this Act shall apply to the foreign company and the said Indian subsidiary company without any benefit, exemption or relief under sub-section (1).
(3) Where, in a previous year, any benefit, exemption or relief has been claimed and granted to the foreign company or the Indian subsidiary company in accordance with the provisions of sub-section (1) and, subsequently, there is failure to comply with any of the conditions specified in the scheme or in the notification issued under sub-section (1), then,-
(i) such benefit, exemption or relief shall be deemed to have been wrongly allowed;
(ii) the Assessing Officer may, notwithstanding anything contained in this Act, re-compute the total income of the assessee for the said previous year and make the necessary amendment; and
(iii) the provisions of section 154 shall, so far as may be, apply thereto and the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the failure to comply with the condition referred to in sub-section (1) takes place.
(4) Every notification issued under this section shall be laid before each House of Parliament.
-------------------- 1. Ins. by Act 23 of 2012, s. 55 (w.e.f. 1-4-2013).
Official legislation and regulatory resources
- Income Tax Department: Section 115JG of the 1961 Act
- Income Tax Department: legislation and notifications
- Reserve Bank of India: banking regulation and conversion schemes
- India Code: central legislation, including the Income-tax Act, 2025
For a live conversion, check the latest operative notifications and RBI directions rather than relying solely on a general description of the statute.
Frequently asked questions
What does Section 115JG provide?
It provides conditional relief when an Indian branch of a foreign company carrying on banking business converts into an Indian subsidiary under an RBI scheme.
Is the conversion automatically exempt from capital gains tax?
No. Relief depends on compliance with the RBI scheme and conditions notified by the Central Government.
What happens if the conditions are breached?
Previously granted benefits may be withdrawn, and the Assessing Officer may recompute income and amend the assessment.
What is the corresponding provision under the Income-tax Act, 2025?
Section 219 covers conversion of an Indian branch of a foreign banking company into an Indian subsidiary from tax year 2026-27.
Legal information: This article is general information and does not replace transaction-specific tax or regulatory advice.