The creation of India’s International Financial Services Centre in GIFT City marked a major milestone in the country’s strategy to engage more directly with global capital markets. Strategically located in Gujarat, this financial district has been designed to serve as a single-window destination for a variety of cross-border financial services. It offers capabilities in asset management, capital markets, insurance, banking, and even the management of family offices. The objective is to bring international financial transactions and operations under a unified, business-friendly regime while maintaining compliance with domestic laws.
The IFSC’s regulatory classification sets it apart from other financial hubs in the country. For foreign exchange purposes, it is treated as if it were located outside India, creating a framework more closely aligned with international jurisdictions. However, for income tax purposes, it remains under the Indian resident category, which enables integration with national tax systems while benefiting from special provisions designed to attract foreign participation. This dual identity provides both the flexibility of offshore operations and the assurance of domestic regulatory familiarity.
The centre has quickly become a base for launching investment funds with both global and India-focused strategies. Approximately eighty-nine fund schemes have already been initiated within the IFSC, reflecting the growing interest among asset managers and investors. These schemes span a variety of asset classes, investment approaches, and risk profiles. The appeal lies not only in the regulatory structure but also in the supporting infrastructure, which has been built to accommodate high-volume, high-speed transactions across time zones.
Positioning Among Global Financial Hubs
One of the most significant developments for the IFSC has been the reform of its fund management framework. In recent years, the regulations governing funds in this jurisdiction have been restructured to better match the expectations of international investors. The result has been a competitive environment that stands on equal footing with established offshore centres such as the Cayman Islands, Mauritius, Luxembourg, and Singapore.
This competitiveness is achieved through a combination of legal clarity, simplified compliance processes, and a cost-effective tax structure. For many fund managers, operating within the IFSC offers the benefit of proximity to India’s growing economy, access to skilled professionals, and a familiar cultural and legal environment, all without sacrificing the operational freedoms available in offshore jurisdictions.
The reforms have also been designed to address the specific needs of the Indian financial sector. Domestic fund managers who previously looked overseas to establish global products can now do so from within India, capturing more economic activity locally while still marketing their funds internationally. This has created a pipeline of new fund launches, further adding to the IFSC’s reputation as a viable alternative to foreign-based structures.
The IFSC Authority (Fund Management) Regulations, 2022
The regulatory landscape for funds in the IFSC underwent a major overhaul with the introduction of the IFSC Authority (Fund Management) Regulations, 2022, commonly referred to as the FME Regulations. These replaced the earlier framework derived from the SEBI Alternative Investment Funds Regulations, 2012. The change was not merely cosmetic; it introduced a new approach that directly regulates fund managers rather than focusing solely on the funds themselves.
Under the new system, fund managers—referred to as Fund Management Entities or FMEs—are subject to comprehensive guidelines that cover their operations, governance, and interactions with investors. The regulations establish clear procedures for registration, set out permissible investment strategies, and detail the obligations of FMEs in areas such as disclosure, risk management, and compliance.
One of the key objectives of the FME Regulations is to align the IFSC’s fund management rules with global best practices. By studying the operational models of leading international financial centres, the IFSC Authority has been able to integrate successful features while ensuring compatibility with the Indian legal environment. This combination provides reassurance to foreign investors and allows domestic fund sponsors to operate under a familiar yet internationally competitive regime.
Categories of Fund Management Entities
The FME Regulations recognise three principal categories of fund management entities, each designed to serve different investor bases and investment strategies.
The first category is the Authorised FME. This type of manager is intended for the operation of venture capital schemes that focus on start-ups and early-stage ventures. These schemes typically invest in high-growth companies with innovative business models, often in technology, healthcare, or other emerging industries. By concentrating on early-stage opportunities, Authorised FMEs play a role in nurturing new enterprises and supporting innovation.
The second category is the Registered FME (Non-retail). This structure is designed for pooling funds from accredited investors, such as institutional investors and high-net-worth individuals. These FMEs can invest in a wide range of securities and financial products and may also undertake activities such as the private placement of Real Estate Investment Trusts or Infrastructure Investment Trusts. The investment is typically conducted through restricted schemes, which limit participation to qualified investors capable of understanding and bearing the associated risks.
The third category is the Registered FME (Retail). These managers can accept funds from all types of investors, not just accredited participants. They can operate retail schemes as well as restricted schemes. However, unlike venture capital or restricted schemes, retail schemes are not classified as Alternative Investment Funds under the regulations. This distinction is important for understanding the regulatory and tax treatment of such schemes.
Venture capital schemes fall under Category I Alternative Investment Funds, while restricted schemes may be classified as Category I, II, or III AIFs depending on the specific investment approach adopted. This classification affects not only regulatory oversight but also the applicable tax rules, which are addressed in later sections of this series.
Structuring Options for Fund Management Entities
Fund management entities in the IFSC can be organised in a variety of legal forms to suit their operational needs and the preferences of their investors. The most common forms are companies, limited liability partnerships (LLPs), and branches of existing entities. Each form carries its own implications in terms of governance, liability, and taxation.
A company structure provides a familiar corporate framework with clear separation between ownership and management. It is often preferred by institutional investors who value formal governance structures and regulatory oversight. An LLP offers operational flexibility and tax transparency for certain types of income, making it attractive to managers who prioritise simplicity in profit distribution. A branch structure allows an existing foreign or domestic fund manager to establish a presence in the IFSC without creating a separate legal entity, which can be advantageous for operational efficiency.
Tax Framework for Fund Management Entities
Taxation is a central consideration for fund managers when selecting a jurisdiction, and the IFSC offers several advantages in this respect. Companies and LLPs engaged in fund management within the IFSC are eligible for a tax holiday on management fees for a period of ten years. This significantly reduces operational costs and increases the competitiveness of IFSC-based managers in the global marketplace.
In addition to the tax holiday, companies are subject to a Minimum Alternate Tax of nine per cent unless they opt for a concessional tax regime. LLPs are instead subject to an Alternative Minimum Tax at the same rate. Profit distributions are treated differently depending on the entity type. For companies, dividends are taxable in the hands of shareholders, whereas LLP distributions are exempt from tax. Branches are taxed in line with their underlying structure, whether company or LLP.
This tax framework is designed to attract both new fund managers establishing their first offshore-style operations and established managers looking to relocate or expand. By offering a predictable and favourable tax regime, the IFSC reduces barriers to entry and encourages long-term investment in its financial ecosystem.
Strategic Importance of the New Regime
The transformation of the IFSC’s regulatory and tax environment through the FME Regulations has been a deliberate move to position the jurisdiction as a gateway for both inbound and outbound investments. For inbound investments, funds based in the IFSC can serve as vehicles to channel foreign capital into India’s growth sectors. For outbound investments, they provide Indian investors with a platform to access global markets without the need to establish funds in foreign jurisdictions.
The simplified compliance framework reduces administrative complexity for fund managers, allowing them to focus on investment strategy and portfolio performance. By consolidating registration and reporting requirements, the IFSC has streamlined the operational workflow, making it easier for managers to scale their operations and launch new products.
The emphasis on aligning with global best practices ensures that IFSC-based funds can appeal to an international investor base. This is particularly important for managers seeking to attract capital from institutional investors, who often require a high degree of regulatory assurance before committing funds.
Understanding the Taxation Framework for Category I and II AIFs
Alternative Investment Funds in the IFSC that are registered as Category I or Category II under the Fund Management Regulations are treated as investment funds under Indian income tax law. The law accords these funds a partial pass-through status for tax purposes, meaning that certain types of income are taxed directly in the hands of investors while other types are taxed at the fund level.
The pass-through treatment applies to investment income, such as interest, dividends, and capital gains. This income is taxed in the hands of investors as if they had made the investment directly, maintaining the same character as it would have had if received without the involvement of the fund. Business income, however, does not enjoy pass-through treatment and is taxed at the fund level. The applicable tax rate for business income depends on the legal form of the fund. A company or LLP pays tax at the ordinary corporate or partnership rates, while a trust is taxed at the maximum marginal rate. Where eligible, a tax holiday may apply, providing a significant advantage in the early years of operation.
Funds are also required to deduct tax at source when distributing income. For investors who are Indian residents, the withholding rate is ten per cent. For non-resident investors, the applicable rate is determined either by the provisions of domestic law or by the terms of a double taxation avoidance agreement with the investor’s country of residence. This ensures that the correct amount of tax is collected and remitted to the authorities, while also providing clarity for investors about their net returns.
Losses are treated differently depending on their nature. Business losses remain at the fund level and may be carried forward subject to the applicable rules. Other losses, such as capital losses, can be passed on to investors, but only if they have held their units for at least twelve months. This ensures that short-term investors do not benefit from tax attributes generated during their brief holding period.
When investors sell their units in a Category I or II AIF, any gain on the sale is subject to capital gains tax. The rate depends on whether the gain is classified as long-term or short-term and the type of asset from which it is derived. Non-resident investors may be exempt from obtaining a Permanent Account Number or filing a tax return in India if certain conditions are met, simplifying their compliance obligations.
Indicative Tax Rates for Investors in Category I and II AIFs
Tax rates for income distributed by Category I and II AIFs vary based on the investor’s residency status and the type of income received. For Indian resident investors, dividend and interest income may be taxed at rates up to thirty per cent, while capital gains are taxed at rates ranging from twenty to thirty per cent. For non-resident investors, dividends are generally taxed at twenty per cent, and interest on foreign currency debt is also taxed at twenty per cent. Capital gains for non-residents can range from ten to forty per cent depending on the nature of the asset and the holding period.
These rates are subject to the provisions of applicable tax treaties, which may reduce the tax burden for qualifying investors. This treaty relief is an important consideration for structuring investments, particularly for funds seeking to attract global capital.
Taxation Nuances for Category III AIFs
Category III AIFs, which typically employ complex or diverse trading strategies, have a distinct tax treatment. The approach depends heavily on the composition of the investor base and the legal form of the fund. In a scenario where the investor base is mixed, containing both Indian residents and non-residents, the trustee of the fund is taxed as a representative assessee. This means that the trustee is responsible for paying tax on income attributable to each investor according to their individual tax status.
For non-resident investors in mixed funds, certain types of income are taxed at specific rates. Dividend income is taxed at twenty per cent, interest on foreign currency debt at twenty per cent, and capital gains at rates ranging from ten to forty per cent. There are important exemptions for certain transactions, such as the transfer of securities other than shares of an Indian company, income from a securitisation trust, and transfers of specified securities listed on an IFSC exchange. In addition, interest and dividend income may be taxed at ten per cent, and capital gains on equity shares can be taxed at rates between ten and thirty per cent depending on the holding period.
Where all investors in a Category III AIF are non-residents, except for units held by the sponsor or manager, the tax regime changes substantially. In this case, non-resident investors are generally exempt from Indian tax on fund income, and the fund itself pays tax only on certain specified categories of income. Offshore income attributable to non-resident investors is exempt from tax altogether, and transfers of fund units by such investors are also free from Indian taxation. This arrangement makes the IFSC particularly attractive for setting up Category III AIFs aimed at global investors.
Offshore Investment Income in Category III AIFs
When a Category III AIF earns income from investments made outside India, the tax treatment depends on the residency status of the investors. For Indian resident investors, offshore dividend and interest income is taxed at ordinary rates, with a maximum rate of thirty per cent. Offshore capital gains are taxed at rates between ten and thirty per cent. For non-resident investors, offshore income is generally exempt from Indian tax, preserving the attractiveness of IFSC-based funds as vehicles for global investment strategies.
This distinction creates opportunities for structuring funds to attract different types of investors while optimising after-tax returns. Funds aimed primarily at non-residents can benefit from an almost complete exemption on offshore income, while mixed funds must account for the differing tax outcomes for resident and non-resident investors.
Transfer of Units and Investor Compliance
The sale or transfer of units in a Category III AIF is generally taxable for investors, with rates ranging from ten to forty per cent depending on the nature of the gain. However, where all investors are non-residents and the fund qualifies under the special regime described earlier, such transfers are exempt from Indian tax. This exemption extends to redemption of units as well, creating a highly tax-efficient exit environment for eligible non-resident investors.
Another important feature of the IFSC tax regime is the potential exemption for non-resident investors from certain compliance requirements. Under specified conditions, non-residents investing in IFSC-based funds may not be required to obtain a Permanent Account Number or file a tax return in India. This simplifies the investment process and reduces the administrative burden on global investors.
Relocation of Offshore Funds to the IFSC
To encourage global funds to move their base of operations to India, the law provides a framework for the tax-neutral relocation of offshore funds to the IFSC. This initiative recognises that many Indian asset managers and investors use offshore jurisdictions for fund structures, and seeks to provide a viable domestic alternative.
For a relocation to qualify as tax-neutral, several conditions must be met. The offshore fund must be a tax resident of a country with which India has a tax treaty. This ensures that the fund is subject to a recognised system of taxation and that treaty provisions can govern the allocation of taxing rights. The fund must also be regulated in its home jurisdiction by an authority responsible for investor protection, providing assurance that it meets minimum governance and compliance standards.
The relocation must be completed by a specified date, which is currently set at 31 March 2025. The transfer of assets and operations to the IFSC should be structured so that the IFSC-based fund issues shares or units as consideration to the offshore fund or directly to its investors. This mechanism allows for the seamless continuation of investor ownership without triggering tax liabilities on the transfer.
Impact of Relocation on Taxation
Once relocated, the tax treatment of the IFSC fund will follow the rules applicable to its category and structure. For Category I and II AIFs, the pass-through model applies, with tax levied at the investor level. For Category III AIFs, the tax treatment depends on the composition of the investor base as outlined earlier. The relocation does not reset the cost of acquisition or the holding period of the assets, which means that capital gains calculations can continue without interruption. Any losses that existed in the offshore fund at the time of relocation can be carried forward to the IFSC-based fund, preserving their value for future tax offset purposes.
Investors in a relocated fund can also benefit from the same exemptions available to other IFSC fund investors. For eligible non-resident investors, this can include relief from the requirement to obtain a Permanent Account Number or file a tax return in India. This continuity in investor treatment is crucial for ensuring that the relocation process does not create additional compliance burdens or unexpected tax outcomes.
Strategic Considerations for Relocation
Relocating an offshore fund to the IFSC is not simply a matter of meeting the statutory requirements. Fund managers must carefully assess the operational, regulatory, and investor relations aspects of such a move. The potential benefits include improved access to Indian investment opportunities, closer proximity to the domestic investor base, and a tax regime designed to attract global capital. However, managers must also consider the impact on existing investor expectations, the compatibility of the IFSC regulatory framework with the fund’s strategy, and the logistics of transitioning service providers and operational infrastructure.
A well-planned relocation can result in a more efficient and competitive fund structure, capable of serving both domestic and international investors. The key is to align the relocation with the fund’s long-term objectives and to communicate clearly with all stakeholders throughout the process. By taking advantage of the tax-neutral provisions and understanding the nuances of the IFSC tax regime, fund managers can position their vehicles for sustained growth in a competitive global environment.
Offshore Funds Versus IFSC Funds
Investment managers and global investors often weigh the benefits of structuring funds in offshore jurisdictions against those of locating them within the International Financial Services Centre. The comparison extends across taxation, operational efficiency, regulatory compliance, and investor accessibility.
In many traditional offshore jurisdictions, funds are taxed primarily at the fund level, with little or no tax levied on investors directly. This approach simplifies administration but can limit the ability of investors to utilise treaty benefits or offset taxes paid in the jurisdiction against their domestic liabilities. By contrast, certain categories of funds in the IFSC operate under a pass-through model, where income is taxed in the hands of investors, enabling them to potentially claim credit for taxes paid and to benefit from treaty provisions. This difference is particularly important for institutional investors who need to integrate cross-border tax positions.
Interest and dividend income in offshore funds is often taxed at a flat twenty per cent for non-residents, while in the IFSC the rate can be as low as ten per cent for certain Category III funds where all investors are non-residents. Capital gains treatment also differs significantly. Offshore funds may be subject to rates ranging from ten to forty per cent depending on the asset type, whereas certain IFSC structures can offer exemptions for capital gains on specified securities listed on IFSC exchanges, and for transfers of fund units by eligible non-resident investors.
The ability to credit taxes paid in the IFSC against home country obligations is another differentiator. In some offshore jurisdictions, the absence of a tax treaty with the investor’s home country means that any tax paid may not be creditable, potentially reducing net returns. The IFSC benefits from India’s extensive treaty network, allowing many investors to claim relief for taxes paid. This feature strengthens its position as a jurisdiction that can combine operational proximity to Indian markets with internationally recognised tax frameworks.
Distribution and Exit Considerations
Distributions from offshore funds may be structured in various ways to minimise investor-level tax liabilities. In the IFSC, distributions are typically subject to withholding at rates that depend on investor residency and income type. For Category I and II funds, withholding applies to investment income and capital gains distributed to investors, while for certain Category III funds with all non-resident investors, distributions can be entirely exempt from Indian tax.
The taxation of redemptions is also a key consideration. In offshore jurisdictions, redemption proceeds may be treated as capital gains or as a return of capital, with differing tax consequences. In the IFSC, the tax treatment follows the character of the income distributed, and in some cases, such as with eligible non-resident investors in certain Category III structures, redemptions can be tax-free. This creates a more predictable and potentially advantageous environment for investors planning their exit strategies.
Regulatory Alignment and Global Competitiveness
Regulatory standards in the IFSC are designed to be comparable to those of established offshore centres, but with the added advantage of integration into India’s financial and legal system. The Fund Management Regulations consolidate requirements for fund managers and ancillary activities, reducing complexity and enhancing operational efficiency. The regime supports a range of structures, from venture capital schemes to retail investment products, with clear provisions for each category.
The reforms in the IFSC have positioned it as a credible alternative to traditional jurisdictions like Mauritius, Cayman Islands, Luxembourg, and Singapore. For asset managers targeting both domestic and international capital, the ability to operate under a regulatory system that balances investor protection with business flexibility is a compelling proposition. This regulatory clarity, combined with competitive tax treatment, strengthens the IFSC’s attractiveness for fund domiciliation.
Strategic Use of the IFSC for India-Focused Funds
For India-focused investment strategies, locating the fund in the IFSC can offer significant operational and tax efficiencies. The IFSC’s status as a deemed foreign territory under foreign exchange laws means that it can accept both domestic and foreign capital under a streamlined regime, while still being treated as an Indian resident for income tax purposes. This unique positioning allows fund managers to pool global and domestic capital without the complexities of navigating separate regulatory systems.
An India-focused fund in the IFSC can invest in Indian securities, real estate investment trusts, and infrastructure investment trusts with minimal regulatory friction. At the same time, it can structure its operations to ensure treaty access for foreign investors and to offer competitive post-tax returns. These features are particularly relevant for managers seeking to raise capital from global institutional investors while retaining operational oversight from within India.
Family Investment Funds in the IFSC
Family Investment Funds, or FIFs, represent a specialised category of pooling vehicles designed for the needs of a single family. They allow high-net-worth families to consolidate wealth management, estate planning, and investment strategies under a single, regulated structure. The IFSC provides a clear legal and regulatory framework for establishing FIFs, enabling families to operate with the same level of governance and compliance as institutional funds, but with the flexibility to tailor investment policies to their unique objectives.
An FIF in the IFSC can be structured as a trust, a company, or a limited liability partnership. The choice of structure will depend on the family’s governance preferences, tax considerations, and long-term investment strategy. In the case of a trust, beneficiaries must have fixed and identifiable interests, ensuring clarity in the allocation of income and capital. Contributions to the fund can only be made by family members, which includes lineal descendants, their spouses, and entities under family control. This restriction preserves the integrity of the fund as a family-only vehicle.
Capital and Investment Policies for FIFs
The regulations require that an FIF reach a minimum corpus of ten million US dollars within three years of registration. This threshold ensures that the vehicle operates at a scale consistent with its purpose as a dedicated family wealth management platform. Indian entities are permitted to contribute up to fifty per cent of their net worth to an FIF in the IFSC, providing flexibility for families with significant domestic holdings to participate fully in the structure.
FIFs have the freedom to borrow or use leverage in accordance with a defined policy, enabling them to pursue a broad range of investment strategies. This can include direct investments in businesses, participation in alternative investment funds, acquisitions of real estate, or allocations to global capital markets. The regulatory framework supports this flexibility while requiring appropriate risk management and compliance oversight.
Tax Treatment of Family Investment Funds
The tax regime for FIFs in the IFSC varies depending on the legal form chosen. In the case of a trust, the trustee is taxed on behalf of the beneficiaries, with the tax rate determined by the nature of the income and the status of the beneficiaries. Capital gains are generally taxed at rates between twenty and thirty per cent, while dividend and interest income can be taxed at rates up to thirty per cent. Profit distributions from the trust to beneficiaries are not subject to further tax.
An LLP structure results in taxation at the entity level, with profits distributed to partners free from additional tax. Capital gains and investment income are taxed at similar rates to those applicable to trusts. A company structure involves taxation at the corporate level, followed by taxation of dividends in the hands of shareholders, which can result in a higher overall tax burden compared to other forms. However, all structures can benefit from the ten-year tax holiday available to eligible business income, which can significantly reduce the tax liability in the initial years of operation.
Business Income and the Ten-Year Tax Holiday
FIFs can claim a ten-year tax holiday on business income derived from eligible activities in the IFSC. This holiday is designed to encourage the establishment and operation of investment vehicles within the centre, providing substantial cost savings during the growth phase of the fund. It is important to note, however, that other forms of income may still be taxed at the maximum applicable rate, and care must be taken in structuring activities to maximise the benefit of the exemption.
The availability of the tax holiday makes the IFSC particularly attractive for families seeking to centralise business ventures, private equity investments, and other active income-generating activities under one roof. By aligning the investment strategy with the scope of eligible business income, families can achieve significant long-term tax efficiencies.
Governance and Compliance in FIF Structures
Strong governance is essential for the effective operation of a Family Investment Fund. The IFSC regulatory framework requires the appointment of fit and proper persons to key management roles and mandates clear documentation of investment policies, risk management frameworks, and compliance procedures. For trusts, this includes a well-defined trust deed and beneficiary rights; for companies and LLPs, it involves constitutional documents and shareholder or partner agreements that reflect the family’s objectives.
Compliance requirements are proportionate to the private nature of FIFs but are nonetheless rigorous enough to ensure transparency and accountability. Periodic reporting to the IFSC Authority, adherence to anti-money laundering and counter-terrorist financing rules, and maintenance of proper books and records are all part of the operational obligations.
Strategic Advantages of FIFs in the IFSC
Establishing an FIF in the IFSC offers several strategic advantages. Families can consolidate assets across geographies, integrate investment and succession planning, and access both domestic and global markets from a single jurisdiction. The proximity to India’s financial ecosystem, combined with international regulatory standards, allows families to manage their wealth efficiently while retaining control over strategic decision-making.
The IFSC also facilitates cross-border investment opportunities for FIFs, enabling them to diversify holdings beyond India without the administrative complexity that might arise in purely domestic structures. This global reach, coupled with the tax and operational benefits available, positions FIFs as a powerful tool for long-term wealth preservation and growth.
Conclusion
The International Financial Services Centre at GIFT City has emerged as a strategically important hub for global and India-focused investment activity. Its distinctive position as a deemed foreign territory under foreign exchange laws but an Indian resident for income tax purposes enables it to combine cross-border accessibility with the stability of India’s legal and financial framework.
Through the Fund Management Regulations, the IFSC offers fund managers a clear and consolidated rulebook that aligns with global best practices, while its tax regime provides competitive rates, exemptions, and pass-through treatment for many structures. Whether through Category I and II funds with investor-level taxation, or Category III funds offering exemptions for non-resident investors, the IFSC framework accommodates diverse investment strategies and investor profiles.
Relocation provisions further enhance its appeal, allowing offshore funds to shift to the IFSC on a tax-neutral basis while preserving asset cost and holding periods. For family wealth, the Family Investment Fund regime offers a bespoke platform for managing assets, integrating succession planning, and pursuing both domestic and international investment opportunities.
In a global environment where regulatory certainty, operational efficiency, and post-tax returns are key competitive differentiators, the IFSC stands out as a jurisdiction capable of matching traditional offshore centres while offering unique advantages for India-linked capital flows. For fund managers, investors, and family offices seeking a credible, compliant, and cost-efficient base of operations, the IFSC presents a compelling choice that is likely to grow in importance as India’s role in the global economy expands.