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Define Financial institution as per income tax act

Pranav Aggarwal (515 Points)

05 September 2019

pls explain??

what does it includes?

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Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (174741 Points)
Replied 06 September 2019

"financial institution" means a custodial institution, a depository institution, an investment entity, or a specified insurance company.

Explanation.- For the purposes of this clause,-

(a)		"custodial institution" means any entity that holds, as a substantial portion of its business, financial assets for the account of others and where its income attributable to the holding of financial assets and related financial services equals or exceeds twenty per cent. of its gross income during the three financial years preceding the year in which determination is made or the period during which the entity has been in existence, whichever is less;
(b)		"depository institution" means any entity that accepts deposits in the ordinary course of a banking or similar business;
(c)		"investment entity" means any entity,-

(A)

that primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer, namely:-

(i)		trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or
(ii)		individual and collective portfolio management; or
(iii)		otherwise investing, administering, or managing financial assets or money on behalf of other persons; or

(B)

the gross income of which is primarily attributable to investing, reinvesting, or trading in financial assets, if the entity is managed by another entity that is a depository institution, a custodial institution, a specified insurance company, or an investment entity mentioned in sub-clause (A) of this clause.

		Explanation 1.- An entity is treated as primarily conducting as a business one or more of the activities described in sub-clause (A) of this clause, or an entity's gross income is primarily attributable to investing, reinvesting, or trading in financial assets for purposes of sub-clause (B) of this clause, if the entity's gross income attributable to the relevant activities equals or exceeds fifty per cent. of the gross income of the entity during the shorter of the three-year period ending on 31st March of the year preceding the year in which the determination is made or the period during which the entity has been in existence.
		Explanation 2.- The term "investment entity" shall not include an entity that is an active non-financial entity merely because it meets any of the criteria provided in sub-clause (iv), (v), (vi) or (vii) of clause (A) of Explanation to clause (6) of this rule;
(d)		"specified insurance company" means any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract;