For Indian residents, however, investing through GIFT City does not by itself make income or capital gains tax-free. The tax treatment depends on the investor’s residential status, the nature of the investment and the structure through which it is held.
What are the tax benefits in GIFT City?
Eligible IFSC units can claim a 100% deduction of qualifying business income for 10 consecutive years out of a specified 15-year period, subject to conditions.
Transactions executed on IFSC exchanges can also be exempt from Securities Transaction Tax (STT), Commodities Transaction Tax (CTT) and stamp duty. Certain financial services and fund structures have additional tax provisions.
CA Kinjal Shah, President, Bombay Chartered Accountants’ Society (BCAS), a voluntary professional body for Chartered Accountants, said these provisions should not be treated as a general tax exemption for investors.
“The real advantage for residents is cheaper transactions, foreign currency exposure and diversification, not a personal tax holiday,” Shah said.
Some exemptions are instead relevant to eligible funds and non-resident investors.
Anis Bohra, Designated Partner, Alchemy Investment Management LLP and Chief Operating Officer, Alchemy Capital Management, an Indian asset management firm, said several of the concessions under the IFSC framework are linked to the status of the investor or the nature of the income.
The tax treatment therefore differs between resident and non-resident investors.
How are resident Indians taxed?
For a resident Indian, income earned from an IFSC investment is generally subject to the applicable Indian tax provisions.
Interest from a foreign-currency deposit, dividends from securities and gains from investments can have different tax treatment. The applicable rules depend on the product and the nature of the income.
For example, the taxation of an IFSC mutual fund or AIF may differ from that of a listed security or a foreign-currency deposit.
Shah said investors should examine the specific product rather than assume that the GIFT City location determines its tax treatment.
Category I and Category II AIFs can also receive pass-through treatment under specified conditions, with income generally taxed in the hands of investors rather than the fund.
For investments linked to overseas assets, residents may also have to consider foreign-source income and the availability of foreign tax credit where tax has already been paid overseas.
Does the $250,000 LRS limit apply?
Yes. Resident individuals using the Liberalised Remittance Scheme (LRS) for eligible investments remain subject to the annual limit of $250,000 per financial year.
GIFT City does not provide an additional personal LRS limit.
Vishal Gada, Founder & CEO, Aurtus, an Indian boutique tax and regulatory advisory firm, said resident investors need to account for the LRS framework when investing through IFSC structures.
There is also a tax collection at source (TCS) implication. For investment-related remittances, TCS is collected at 20% on the amount exceeding ₹10 lakh in a financial year.
The TCS is available as a credit against the investor’s tax liability and can be claimed through the income-tax return, subject to the applicable rules. It can nevertheless affect cash flows at the time of making the remittance.
How are capital gains treated?
Capital gains from GIFT City investments do not follow one uniform tax rate.
The treatment depends on the asset and the applicable provisions of the Income-tax Act. The structure of the investment can also determine whether income is taxed at the fund level or in the hands of the investor.
This distinction is particularly relevant for AIFs and other pooled investment structures.
For residents investing in foreign securities, the applicable rules for overseas assets and the relevant holding period also need to be considered.
Anil Rego, Founder & CEO, Right Horizons PMS, a SEBI-registered portfolio management service, said investors should assess the tax treatment along with the investment structure and the underlying asset.
“While GIFT City can offer meaningful tax and operational efficiencies, the investment merit should remain the primary consideration, with tax efficiency viewed as an additional benefit rather than the sole reason to invest,” Rego said.
Is bringing the money back to India taxable?
Repatriating investment proceeds to India is generally not a separate taxable event by itself.
The relevant tax liability arises from the income or capital gains under the applicable tax provisions. Moving the proceeds from a GIFT City account back to an Indian bank account does not, by itself, create another tax on the same income.
Shah said residents can bring capital and gains back through normal banking channels, subject to applicable foreign-exchange requirements.
Investors should retain records of the investment, income earned, taxes paid and subsequent transfers.
What about disclosure in the income-tax return?
Residents may also have reporting obligations for investments connected with overseas assets.
Gada said direct holdings of foreign equities or foreign depository receipts through GIFT City brokers can require reporting under the Foreign Assets schedule of the income-tax return.
The position can require closer examination for investments in IFSC-based funds and other structures. This is because GIFT City can have a different treatment under foreign-exchange and income-tax laws.
Shah advised investors to check their individual disclosure requirements, particularly where foreign assets or overseas income are involved.
Why the tax treatment can be confusing
One reason for the confusion is that GIFT IFSC has a different position under different regulatory frameworks.
Bohra said GIFT IFSC is treated as offshore for certain purposes under the Foreign Exchange Management Act (FEMA), while it remains within India’s income-tax framework.
This does not mean that income earned by a resident investor escapes Indian taxation. The applicable treatment continues to depend on the investment and the investor’s status.
The same distinction also explains why tax benefits available to an IFSC entity or a non-resident investor cannot automatically be extended to a resident individual.
What should investors check?
Before investing through GIFT City, a resident investor needs to establish the nature of the product, its tax treatment and whether the investment is covered by the LRS framework.
The investor should also check the TCS implications, applicable income-tax return disclosures and, where overseas income is involved, whether foreign tax credit can be claimed.
