Recent tax exemptions for retail schemes and exchange-traded funds (ETFs) at the International Financial Services Centre (IFSC) in GIFT City are expected to attract significant domestic and foreign investments, positioning it as a global financial hub, said experts.
These changes, proposed in the Budget, will grant such schemes tax benefits similar to category III alternative investment funds (AIFs) at the IFSC. Category III funds, known for their complex trading strategies and investments in derivatives, include hedge funds and private investments in public equity deals.
“This move positions GIFT City as an attractive destination for fund managers to raise monies from retail investors for investment in India. The new tax regime aligns with that of similar offshore funds investing into India as foreign portfolio investors (FPIs), and is expected to catalyse the growth of retail schemes within the IFSC,” said Tushar Sachade, partner at Price Waterhouse & Co LLP.
Effective from the assessment year 2025-26, this development will provide a concessional tax rate of 10% on interest and dividend income for the scheme or fund, along with capital gains tax exemption on various securities, experts said.
“The announcement to provide a tax-efficient regime for retail funds and ETFs would create new business opportunities for asset management companies in GIFT City. It would encourage investments from NRIs and foreign retail investors in India,” said Tapan Ray, MD and group CEO of GIFT City.
Setting up of finance companies and treasury units in IFSC has also been made more attractive with exemptions from Section 94B of the Income Tax Act, known as thin capitalisation rules. This section deals with the deduction of interest expenditure incurred by an Indian company or a permanent establishment of a foreign firm.
Currently, interest payments made to non-resident associated enterprises are limited to 30% of Ebitda, with exemptions for non-banking financial companies, banks and insurance companies. Extending similar benefits to finance companies in the IFSC enhances its appeal as a destination for financial activities.
“By simplifying regulatory frameworks and offering tax benefits, the Budget aims to position GIFT City as a competitive hub for international financial services, encouraging foreign investments and promoting the growth of diverse financial products,” said Vivek Singhania, co-founder of Dovetail India.
Despite these developments, some anticipated reforms, such as the tax framework for overseas direct investments (ODIs) by non-banking units, remain pending.
“The absence of a clear tax structure for ODIs could deter potential investors from fully engaging with the Indian market, as uncertainty surrounding taxation often leads to hesitation in making long-term commitments,” Singhania said.
Additionally, tax-related exemptions for specified income of core settlement guarantee funds of clearing corporations have been extended to those set-ups in the IFSC.
The government has also provided relief for venture capital funds housed in the IFSC. These funds will no longer need to explain the source of funds when they extend loans or other amounts to an assessee.
These measures are collectively aimed at enhancing GIFT City’s potential as a key global financial hub, drawing in more investment and economic activity, believe experts.