Harnessing Tax Efficiencies: Launching AIFs in GIFT IFSC
GIFT IFSC is more than a financial hub—it’s a strategic tax-efficient gateway tailored for Alternative Investment Funds (AIFs). For fund managers and investors eyeing global returns, GIFT IFSC offers a powerful combination of structural flexibility, fiscal benefits, and operational simplicity. In this article, we explore the regulatory framework, eligibility criteria, and key tax advantages of establishing AIFs within GIFT IFSC.
What Makes GIFT IFSC Ideal for AIFs
GIFT City’s International Financial Services Centre (IFSC) was crafted to be India’s response to global financial centres. Built as a special economic zone—backed by modern infrastructure and regulatory cohesion—GIFT IFSC provides an ideal launchpad for AIFs. The synergy of international-standard governance and SEZ benefits creates an attractive opening for fund managers aiming to optimize tax outcomes and broaden their investment scope.
Understanding AIFs
AIFs encompass a spectrum of investment vehicles—from venture capital and private equity to hedge funds and commodity portfolios. Categorized into three types, each has unique investment powers and regulatory caps under the SEBI framework:
- Category I: Focused on growth and social impact.
- Category II: Geared toward private equity and debt strategies.
- Category III: Permit leverage and complex instruments, like hedge funds .
These vehicles, when domiciled in GIFT IFSC, gain operational agility and tax structuring advantages.
Key Eligibility Requirements
Setting up an AIF in GIFT IFSC requires a regulated fund management entity (FME), supported by both domestic and international investors. Minimum corpus norms apply:
- Retail/non-retail schemes: Minimum corpus of USD 5 million.
- Venture capital schemes: Up to USD 200 million total ceiling.
Additionally, FME “skin in the game” norms ensure alignment—requiring committed investment across fund categories.
Strategic Tax Advantages
- Pass-Through Taxation for Category I & II
AIFs in GIFT IFSC are treated as pass-through entities, avoiding double taxation. Investors are taxed only once based on their individual outcomes . - Tax Exemption for Non-Resident Investors
Foreign investors not earning income in India enjoy exemption—no PAN, no Indian tax return filing, and no withholding requirements. - Relief from Transactional Levies
Transactions within IFSC are fully exempt from GST, STT, and CTT, while management services from fund managers are GST-exempt. - Tax-Efficient Treatment for Unearned Income
Even Category III funds—typically taxed at fund level—benefit from exemptions on certain non-resident securities and transfers .
Investor Tax Treatment at a Glance
Income Type | Non-Resident Investor | Resident Investor |
Dividends | 20% withholding | Based on slab |
LTCG on specified equity | 12.5% | 12.5% |
LTCG (non-specified) | 12.5% | 12.5% |
STCG on specified equity | 20% | 20% |
Other STCG | Slab rate | Slab rate |
Business income from AIF | Exempt | Exempt |
Note: Rates reflect proposed Finance Bill (No.2) 2024.
Recent Developments: Budget 2024
- Profit Exemption: Profits tied to non-resident units in retail/ETF structures are now exempt.
- Settlement Funds: Specific IFSC settlement schemes enjoy additional relief.
- VCF Fund Relaxations: Easier “source of funds” compliance for VC funds in IFSC.
Conclusion
GIFT IFSC has emerged as a compelling domicile for AIFs—from tax rationalization and simplified compliance to heightened investment flexibility in global markets. With streamlined policies and fiscal incentives, fund managers can launch structures that are investor-friendly, compliant, and future-ready.
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