Retail Funds in GIFT City: What Investors Must Know About Tax Implications

A new global gateway has opened for Indian retail investors.

- GAUTAM NAYAK

A GIFT City-based subsidiary of an Indian mutual fund has launched the country's first open-ended retail fund under the International Financial Services Centres Authority (IFSCA) regulations, marking a key milestone in outbound investment access.

While this opens up a new route for resident Indian investors to gain exposure to global equities, the absence of specific tax provisions for such GIFT City-based retail funds makes it essential to understand how both the fund structure and its investors will be taxed under Indian law.

The fund, which is neither a mutual fund nor an alternative investment fund (AIF), is structured as a trust and designed for resident Indians. Investors will contribute in US dollars via the Liberalised Remittance Scheme (LRS), remitting funds from their Indian bank accounts to the fund's GIFT City account. The fund will offer daily redemptions but impose a 1% exit fee for withdrawals within one year.

TCS on LRS contributions: Investors must route their contributions through the LRS window, which allows up to $250,000 annually. However, any remittance exceeding ₹10 lakh in a financial year will attract a 20% tax collected at source (TCS) on the excess. This TCS is aggregated across all LRS remittances and can later be claimed as tax credit in the investor's income tax return.