GIFT CITY: A NEW GATEWAY TO GLOBAL MARKETS

WHAT IS GIFT CITY?

GIFT City, or Gujarat International Finance Tec-City, established under the SEZ Act, 2005, is India's first International Financial Services Centre (IFSC), established by the Government of India as a gateway for global finance. Located in Gujarat, it spans over 886 acres and is planned to expand to 3,300 acres, offering modern infrastructure and world-class facilities. GIFT City is comparable with leading centres like Singapore, Dubai, and London. It operates under the unified regulatory framework of the IFSCA, which ensures simplified compliance, investor-friendly tax policies, and ease of doing business.

GIFT City IFSC has established itself as India's premier regulated international financial centre, serving as a gateway that connects global capital with Indian investment opportunities while enabling Indian investors to access international markets through a transparent and compliant regulatory framework. For years, Indian investors looking for exposure to global markets largely relied on international mutual funds or direct overseas investing platforms. Now, GIFT City is emerging as a new route for accessing global investment opportunities without leaving India.

Among the key investment vehicles driving this ecosystem are Inbound Funds and Outbound Funds, which facilitate seamless cross-border capital flows. These fund structures offer investors a regulated, tax-efficient, and operationally simplified route for investing into India and overseas through GIFT City IFSC.

Understanding how inbound and outbound funds operate is essential for NRIs, foreign investors, global institutions, family offices, and eligible Indian residents looking to optimize their cross-border investment strategies. This article provides a practical overview of these fund structures, explaining their purpose, benefits, and how GIFT City IFSC has become a strategic hub for channelling investments into and outside India.

HOW RETAIL INVESTORS CAN INVEST

Investing in global markets through GIFT City is streamlined to mirror the simplicity of mutual fund investments. Retail investors have the option to invest directly or via empanelled distributors, following a streamlined onboarding process, fund transfer, and acquisition of units in international investment products. These transactions are conducted under the Reserve Bank of India's Liberalised Remittance Scheme (LRS), which allows Resident Individuals (RI) to transfer up to $250,000 annually. For a family of four, this equates to a collective overseas investment capacity of up to $1 million per financial year.

BENEFITS OF INVESTING IN GIFT CITY (IFSC):

• Capital Gains Tax Exemption (Non-Residents): No capital gains tax on transfer of specified foreign currency-denominated securities listed on IFSC exchanges. For more information, please talk to our experts at Investaffairs.
• No PAN Requirement (Eligible Non-Residents): Certain foreign investors are exempt from obtaining PAN, subject to conditions.
• Stamp Duty Exemption: No stamp duty on transactions executed on IFSC exchanges.
• No STT or CTT: Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) are not applicable on IFSC trades.

WHY GIFT CITY MATTERS FOR INVESTORS?

Key Features at a Glance

KEY DRIVERS

• Currency Risk Mitigation: Given the current economic pressures, including inflation and high crude oil prices, Non-Resident Indians (NRIs) have been increasingly opting for dollar-denominated mutual funds in GIFT City. This strategic shift enables them to maintain their investment in India's growth trajectory while mitigating potential losses due to the depreciation of the Indian Rupee (INR).
• Tax-Efficient USD Returns: Investments routed through IFSC Banking Units (IBUs) in GIFT City delivered attractive USD-denominated yields of 2.5%-5%(gathered from other sites), while remaining exempt from Indian domestic taxation for non-resident investors. This combination of dollar returns and tax efficiency significantly enhanced GIFT City's appeal as a wealth management destination for the global Indian diaspora.
• Broad-Based Retail Participation: Retail investor activity expanded sharply, with active investors in retail schemes increasing by 177% and the total investor base reaching 9,594 (as of the reporting date). The growth highlights rising engagement from mass-affluent NRIs and individual investors, indicating that GIFT City's momentum extends well beyond institutional participation.
• Geopolitical Tailwinds: Escalating tensions in West Asia and disruptions around the Strait of Hormuz drove Brent crude prices higher, intensifying pressure on the Indian rupee. Against this backdrop, overseas Indians increasingly shifted capital toward dollar-denominated investment structures, reinforcing demand for GIFT City's offshore financial offerings.

WHAT ARE OUTBOUND FUNDS IN GIFT CITY IFSC?

Outbound funds represent the other side of the GIFT City IFSC ecosystem. These funds enable Indian capital to invest in global markets through a regulated domestic international platform.

Outbound funds pool capital from Indian residents and eligible investors and deploy it into overseas assets such as international equities, bonds, and global ETFs. They provide a compliant pathway for Indians to diversify portfolios globally without setting up complex offshore structures.

BENEFITS OF INVESTING IN OUTBOUND FUNDS

Allocating a portion of your portfolio to global markets offers three key advantages:

• Sector diversification: Gain exposure to world-leading technology, software, consumer, and healthcare companies that aren't listed in India through indices like the S&P 500 and Nasdaq 100.
• Currency diversification: Overseas investments provide a hedge against long-term rupee depreciation and help protect purchasing power.
• Better portfolio resilience: Global markets don't move in sync with India, helping reduce concentration risk and smooth long-term returns.

The challenge was never the case for global investing-it was access. Domestic international funds hit regulatory limits, while investing directly through LRS remained cumbersome for many investors.

Outbound GIFT City funds aim to bridge this gap, making global diversification simpler and more accessible.

WHAT ARE INBOUND FUNDS IN GIFT CITY?

Inbound funds in GIFT City IFSC are investment vehicles designed to bring foreign capital into India through a regulated international framework. These funds allow non-resident investors to invest in Indian assets without many of the traditional domestic complexities. Inbound funds are USD-denominated investment vehicles registered in GIFT City that invest in Indian securities.

They pool foreign capital from NRIs, OCIs, and foreign investors and deploy it into Indian equities, debt, or other domestic assets.

BENEFITS OF INVESTING IN INBOUND FUNDS

GIFT City offers NRIs a compelling gateway to both Indian and global investment opportunities. Through inbound funds, they can invest in Indian assets such as equities, mutual funds, debt instruments, and even unlisted shares, enabling them to participate in India's growth story without having to navigate the regulatory complexities that typically apply to overseas investors. The investment process is designed to be simple and efficient.

KYC requirements are streamlined and aligned with international standards, making account opening seamless. Fund transfers, including remittance and repatriation, are straightforward, ensuring easy movement of capital. In addition, GIFT City's investor-friendly tax framework allows NRIs to optimize their investment returns while avoiding many of the complexities associated with India's conventional tax regime.

Differentiation:

Quick Recall

• Outbound = Money moves OUT of India to global markets.
• Inbound = Money comes IN to India from global investors.

WHO CAN INVEST IN OUTBOUND FUNDS

Primarily resident Indians. Under RBI's Liberalized Remittance Scheme, resident individuals can remit up to $250,000 per financial year for permissible capital account transactions. Investing in GIFT City outbound funds counts against this LRS limit.

The eligibility extends to:

• Resident Indian individuals under LRS
• Hindu Undivided Families
• Family offices and high-net-worth investors
• Indian corporates under specific FEMA provisions

Outbound funds operate in alignment with the Liberalized Remittance Scheme. Indian residents can use their annual LRS limit to invest into USD denominated offshore assets through GIFT City IFSC funds.

WHO CAN INVEST IN INBOUND FUNDS

Inbound funds are primarily targeted at investors located outside India. These include

• Non-Resident Indians and Overseas Citizens of India
• Foreign institutional investors
• Global pension funds
• Sovereign wealth funds
• International family offices

These investors often prefer inbound funds because they provide exposure to India without the need to open Indian bank accounts or navigate multiple domestic regulatory processes.

One of the defining features of inbound funds is that they are denominated in foreign currency, most commonly USD. This reduces currency conversion friction for foreign investors and aligns with international portfolio allocation practices.

Why GIFT City IFSC Matters for Cross-Border Investments

GIFT City IFSC functions as a global financial hub within India. It enables both inbound and outbound capital flows under a single regulatory ecosystem.

Key benefits include

• Tax and compliance efficiency
• Seamless movement of capital into and outside India
• International standard fund structures
• Centralized regulation under IFSCA

TAXATION

The outbound GIFT City mutual funds (such as DSP Global Equity Fund, Parag Parikh IFSC S&P 500 Fund of Fund) are structured as trusts and taxed at the fund level, not at the investor level.

The fund pays tax as a representative assessee using its own PAN. Effective tax rates (including surcharge and cess) are:

LTCG for more than 24 months at 14.95%,

STCG for less than or equal to 24 months at 42.74%, and

Dividend Income at 35.88%.

For non-resident investors, there is generally no need to invoke the provisions of the Double Taxation Avoidance Agreement (DTAA), as no domestic Indian tax liability arises at the investor level. Similarly, neither resident nor non-resident investors are required to pay any additional income tax in India on distributions received from, or redemption proceeds of, the fund.

As the entire tax liability is discharged at the fund level, the same income is not taxed again in the hands of the investors. Accordingly, investors typically report such income as exempt income in their income tax returns (ITRs).

Here's a summary of the tax rates for the fund's global equity income:

Note: Indexation benefit has been discontinued as of 23 July 2024.

ONBOARDING

Because these are not domestic mutual funds, existing KYC and folios with Indian AMCs do not automatically apply. Onboarding for GIFT City would be separate from mutual fund onboarding. The process supports both physical forms and digital onboarding, making the experience simple and seamless. Think of this as opening a new relationship with a GIFT City fund platform - still far simpler than opening a foreign brokerage account directly in the US, but not yet as seamless as "Start SIP" on your regular mutual fund app. Over time, the expectation is that the user experience will converge. On receipt of funds, units are allotted, and a Statement of Account (SOA) is issued.

REQUIREMENT FOR PORTFOLIO

• It is always advisable to have Net Banking access through HDFC, Axis, ICICI, or IDFC Bank to facilitate the online investment process.
• An investor must obtain his/her CKYC via the following methods:
  - Missed Call: 7799022129
  - Online: Visit www.ckycindiabank.in and select "View CKYC Card"
  - DigiLocker: Fetch your CKYC Card through the application

India's Growth Drivers - Why It Matters

• Demographic Strength: India has the world's largest young population, with a median age of 28 years.
• Digital Leadership: Ranked #1 globally in real-time digital payments adoption.
• Urban Expansion: By 2035, nearly 43% of India's population is projected to reside in urban areas.
• Economic Formalization: Initiatives such as GST implementation and increased digital compliance are accelerating the growth of the formal economy.
• Stable Economic Growth: India continues to demonstrate strong economic resilience, supported by steady GDP growth of 6-7% and healthy foreign exchange reserves.

FAQ

Q1. What makes GIFT City unique compared to traditional investment routes?

It offers simplified access, tax efficiency, and direct participation in India's growth without requiring local bank or Demat accounts.

Q2. Do investors need to file tax returns in India for GIFT City investments?

No. If Non-resident investors are earning income solely from IFSC-based funds, they need not file tax returns in India.

Q3. Can Indian residents invest in GIFT City funds?

Yes.

Q4: Is the fund regulated by SEBI?

GIFT City is regulated by IFSCA. While separate from SEBI, IFSCA combines elements of SEBI, RBI, IRDAI, and PFRDA for oversight, with strong governance and investor protection.

Q5: What are the tax implications at the time of redemption?

No tax is payable by the investor at redemption, as the fund pays tax on the income at its end.

TAX IMPLICATIONS ON THE RETURNS GENERATED ON THE INBOUND FUNDS

KYC REQUIREMENTS

• Identity Proof: Passport, National ID, Driving License, or Voter ID.
• Address Proof: Passport, Tax ID with photo, Driving License, or Utility Bill.
• Zero-balance account opened after verification.

P.S. Documents must be certified by authorized entities such as banks, notaries, or consulates in FATF compliant jurisdictions.

INFERENCE

GIFT City IFSC marks a significant milestone in India's evolution as a global financial hub by creating a transparent, internationally aligned, and investor-friendly ecosystem for cross-border investments. Through its unified regulatory framework under the IFSCA, robust infrastructure, tax efficiencies, and simplified compliance, GIFT City bridges the gap between Indian and global capital markets.

The combination of USD-denominated investment structures, streamlined onboarding, efficient capital movement, and competitive tax treatment has strengthened GIFT City's appeal as an emerging international financial centre. At a time when investors increasingly seek geographical diversification, currency hedging, and globally integrated investment opportunities, GIFT City offers a compelling platform that balances accessibility with regulatory oversight. As India's financial markets continue to integrate with the global economy, GIFT City is well positioned to become the preferred gateway for both inbound and outbound investments.