Introduction
A new gateway for resident Indians to diversify their investment portfolios internationally is rapidly gaining traction: Gujarat International Finance Tec-City (GIFT City). This International Financial Services Centre (IFSC) offers a promising alternative to the traditional routes of investing in foreign mutual funds. This detailed analysis explores the intricacies of this burgeoning investment avenue, weighing its advantages and disadvantages for the resident Indian investor.
The Regulatory Landscape: A Unified Approach
Investing in foreign mutual funds from India has primarily been facilitated through the Liberalised Remittance Scheme (LRS), which allows resident individuals to remit up to $250,000 per financial year for permissible current and capital account transactions. While this remains the foundational framework for investing through GIFT City, the regulatory environment within the IFSC is governed by the International Financial Services Centres Authority (IFSCA). This unified regulator aims to provide a more streamlined and agile framework compared to the multiple regulatory bodies governing mainland India.
The Investment Process: A Step-by-Step Guide
For a resident Indian, the journey to investing in foreign mutual funds through GIFT City involves the following key steps:
- Opening an Account: The first step is to open an account with a broker registered with the IFSCA in GIFT City. Several prominent Indian brokerage firms have established their presence in the IFSC.
- KYC Compliance: The Know Your Customer (KYC) process is mandatory. While often touted as “simplified,” in practice for a resident Indian, it typically involves the standard documentation of PAN, Aadhaar, and proof of address. The primary difference lies in the account being denominated in a foreign currency (usually US dollars).
- Funding the Account via LRS: The investor then remits funds from their Indian bank account to their GIFT City account under the LRS. This involves informing the bank about the purpose of the remittance, which is investment in the IFSC.
- Investing in Funds: Once the account is funded, the investor can choose from the available foreign mutual funds offered by Asset Management Companies (AMCs) operating in GIFT City.
The Tax Advantage: A Closer Look for Resident Indians
One of the most significant attractions of routing foreign investments through GIFT City is the potential for tax efficiency. Here’s a comparative analysis for resident Indians:
| Tax Aspect | Investing Directly Overseas (LRS) | Investing via GIFT City (IFSC) |
| Capital Gains | Gains from foreign securities are treated as capital gains and taxed at the applicable slab rates if held for less than 24 months. For a holding period of more than 24 months, they are taxed at 20% with the benefit of indexation. | The tax treatment of capital gains for resident Indians on investments made through GIFT City is currently aligned with the taxation of unlisted shares and other securities. This means long-term capital gains (holding period over 24 months) are taxed at 20% with indexation. Crucially, there is no special tax benefit on capital gains for resident Indians investing in foreign mutual funds through GIFT City at present. |
| Dividend Income | Dividends are added to the investor’s total income and taxed at the applicable slab rates. | Dividends are also added to the total income and taxed at the slab rates. |
| Transaction Taxes | Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT) are not applicable. | A key advantage is the exemption from STT, CTT, and Goods and Services Tax (GST) on transactions carried out on the exchanges within GIFT City. This can lead to cost savings, especially for active investors. |
It is evident that for a resident Indian, the primary tax advantage currently lies in the waiver of transaction taxes, rather than a concessional rate on capital gains or dividends from foreign mutual funds. The more significant tax benefits often highlighted in relation to GIFT City are primarily aimed at Non-Resident Indians (NRIs) and institutional investors.
Comparative Perspective
A comprehensive cost analysis involves looking beyond just taxes:
- Expense Ratios: The expense ratios of mutual funds in GIFT City are expected to be competitive. However, as the market is still nascent, a direct and broad comparison with the expense ratios of international funds available in the Indian market is difficult at this stage.
- Brokerage Charges: Brokerage fees for transacting in GIFT City are determined by the individual brokers and are generally competitive.
- Currency Conversion Charges: Currency conversion fees are incurred when remitting funds under LRS, both for direct overseas investment and for funding a GIFT City account. The charges can vary between banks.
While the absence of transaction taxes in GIFT City is a clear cost-saver, investors need to carefully evaluate the all-in costs, including fund management fees and brokerage, to make an informed decision.
Advantages and Disadvantages: A Balanced View
Advantages for Resident Indian Investors:
- Access to Global Markets: Provides a legitimate and regulated channel to diversify investments globally.
- Potential for Higher Returns: Exposure to international economies and companies can lead to better risk-adjusted returns.
- Circumventing Mainland Restrictions: In the past, the Indian government has imposed restrictions on investments in overseas funds by Indian mutual funds. The GIFT City route can potentially offer a way around such limitations.
- Cost Savings on Transactions: The exemption from STT, CTT, and GST is a direct financial benefit.
- Evolving Ecosystem: The continuous development of GIFT City is likely to bring in more fund houses and a wider array of investment products in the future.
- Foreign current investments is allowed.
Disadvantages and Considerations:
- Limited Fund Options (Currently): The choice of retail-focused foreign mutual funds is still limited compared to established international platforms.
- No Significant Tax Benefit on Gains for Residents: As of now, the capital gains and dividend taxation for resident Indians investing through GIFT City is largely at par with the direct LRS route.
- Evolving Regulatory Framework: While the unified regulator is an advantage, the rules and regulations are still evolving, which could introduce changes in the future.
- Complexity: The process of opening a separate account and routing investments through the LRS might seem more complex to some investors compared to investing in domestic mutual funds with international exposure.
Current landscape
As of September 2025, the investment landscape is dominated by products tailored for high-net-worth individuals and institutional investors, with only one fund explicitly available for retail participation.
The DSP Global Equity Fund stands out as the pioneer in this space, being the first retail-focused offshore fund launched from the International Financial Services Centre (IFSC) for resident Indian investors. This fund offers a direct avenue for individuals to invest in a diversified portfolio of global equities, utilizing the Liberalised Remittance Scheme (LRS) framework. The minimum investment amount required for the DSP Global Equity Fund, the first retail-focused offshore mutual fund launched from GIFT City for resident Indians, is $5,000 (five thousand US dollars).
While several other prominent Asset Management Companies (AMCs) have established a presence in GIFT City, their current fund offerings are not accessible to the average retail investor. Major players including Mirae Asset, SBI Funds, and Nippon India have launched funds from the IFSC; however, these are primarily structured as Alternative Investment Funds (AIFs).
AIFs are characterized by high minimum investment thresholds, often running into lakhs of rupees, making them unsuitable for most retail investors. Furthermore, many of the funds offered by these AMCs are designated as “Restricted Schemes (Non-Retail)” and are explicitly targeted towards Non-Resident Indians (NRIs) and other foreign investors. For instance, Mirae Asset’s “India Equity Allocation Fund” and “Global Allocation Fund” fall under this category and are not available for subscription by resident Indians.
Similarly, while other financial institutions like Kotak Mahindra Bank, HDFC Bank, and ICICI Prudential Asset Management have set up operations in GIFT City, they have not yet launched any retail-focused foreign mutual funds for resident Indians. ICICI Prudential, which recently established its branch, has initiated its offerings with a restricted scheme. HDFC Bank has indicated the future launch of a mutual fund investment platform, but specific retail products are not yet available.
The Verdict: A Promising Avenue for the Informed Investor
Investing in foreign mutual funds via GIFT City presents a compelling proposition for resident Indians looking to diversify their portfolios. The key advantages lie in the potential to bypass certain mainland investment restrictions and the cost savings from the waiver of transaction taxes.
However, it is crucial for investors to have realistic expectations. The tax benefits on capital gains and dividends for resident Indians are not yet a significant differentiator. The choice of funds, while growing, is still in its early stages.
For the savvy investor who understands the nuances of international investing and is willing to navigate the process, GIFT City offers a valuable and regulated gateway to the global markets. As the ecosystem matures and more retail-oriented products become available, its attractiveness as a preferred route for overseas investment is only set to increase. Investors are advised to conduct thorough due diligence on the available funds, associated costs, and the evolving regulatory landscape before making any investment decisions.
Disclaimer:
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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