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Mint
19-07-2025
- Business
- Mint
Financial distributors turn to GIFT City for outbound funds. But few can enter.
Indian investment distributors are increasingly turning to GIFT City to tap into offshore fund offerings, as demand for global equity exposure surges among retail and high-net-worth investors. But here, too, the options are limited. With the traditional route of accessing international markets via domestic mutual funds largely shut due to regulatory caps, distributors—specifically, mutual fund distributors and independent financial advisers—are eyeing GIFT City-based outbound funds as a viable alternative. This bottleneck with the mutual fund route, however, has led to inflated premiums on older global exchange traded fund offerings, leaving investors with few options for diversification. GIFT City, with its status as an international finance hub and relaxed regulatory environment, is emerging as a workaround, which could potentially open a new route for Indian investors seeking to diversify their portfolios with global exposure. 'There is definitely an appetite from people wanting to invest globally," said Vaibhav Shah, head of products, business strategy and international business, at Mirae Asset Investment Managers (India). 'When we say we have an outbound fund, there is interest from distributors to sell the product, and from the investors to buy it." Mirae Asset Global Allocation Fund IFSC, which opened for subscription in April, invests in exchange traded funds tracking global indices in sectors such as artificial intelligence and semiconductors. Jay Kothari, senior vice-president and global head of international business at DSP Mutual Fund, said several clients already invest directly in outbound funds and distributors don't want to miss out on tapping into the growing demand for global equity investing. DSP Asset Managers opened India's first retail-focused offshore mutual fund at GIFT City in June. The Global Equity Fund allows Indian residents to invest as little as $5,000 (about ₹4.3 lakh) in a diversified basket of global stocks without relying on offshore brokerages, feeder funds, or cumbersome tax filings. A cumbersome alternative Indian investors had the option of investing in global equities through mutual funds. RBI, however, has a $7 billion limit on the total overseas investments of mutual funds, with a sub-limit of $1 billion ceiling specifically for foreign exchange traded funds. (Such ETFs own a collection of global stocks and trade on a stock exchange.) RBI's limits were breached around 3 years ago, effectively halting fresh mutual fund investments in global equities. Investments into fund-of-funds, too, have stopped. However, one can invest in ETFs, but since there are only six ETFs in India tracking global indices, this comes at a premium. Turning to GIFT City funds for investing in overseas equities requires routing money through the liberalised remittance scheme. RBI allows individuals to send up to $250,000 overseas via the LRS route, including for investing, without having to take its approval. According to Pramod Gubbi, co-founder at Marcellus Investment Managers, large distributors already have been taking the LRS route to invest in global market funds via jurisdictions like Singapore. 'Now, smaller IFAs and MFDs (independent financial advisers and mutual fund distributors) are also exploring this space since global diversification is essential for all investors. Earlier, smaller players accessed global exposure through mutual funds, but with the overseas limit now capped, they are turning to GIFT City," Gubbi said. This, however, poses certain challenges. 'Investors remitting funds via LRS face a 20% tax collected at source, which, although claimable as advance tax, can act as a psychological burden for many," said Shah of Mirae Asset Investment Managers. Gubbi added that the LRS process is still somewhat cumbersome as not many banks offer fully digital options. Not a proven model Investors have the option of tapping GIFT City alternative investment funds (AIFs) to buy global stocks. But the minimum ticket size to invest in these AIFs is $150,000 (about ₹1.3 crore), making it prohibitive for most retail investors. There is no minimum investment size specified for GIFT City retail outbound funds, but currently there is only one such investment vehicle—DSP Asset Managers's Global Equity Fund. As of 31 March, GIFT City had 135 category III AIFs, as per the International Financial Services Centres Authority's quarterly bulletin. IFSCA, based in GIFT City, is India's unified regulator for international financial services. Kartik Sankaran, founder of Fiscal Fitness, a registered distributor, noted the growing interest in GIFT City outbound funds, but said if the mutual fund route opens up again, investors could return to a route that's already tried and tested. 'Most GIFT City funds are feeder structures that invest into other offshore funds, raising concerns about a fund manager's direct capability in researching and managing global equities," Sankaran said.
Mint
09-07-2025
- Business
- Mint
Retail funds in GIFT City: What investors must know about tax implications
A new global gateway has opened for Indian retail investors. 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. While this opens up a new route for Indian resident investors to access global equities, the absence of specific tax provisions for such funds makes it essential to understand how both the fund 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. Also read: GIFT City is changing how—and where—Indians invest 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. Although GIFT City is treated as an overseas jurisdiction under exchange control rules (FEMA)—requiring investors to use their LRS limit—it is considered part of India for income tax purposes. As a result, both the Fund and its investors must comply with Indian tax regulations. Also read: New funds surge in GIFT City, but old money stays offshore How the Fund may be taxed Since the fund is structured as a trust with Indian tax residency, it does not qualify for tax exemptions that are extended to funds with only non-resident investors. Therefore, standard trust taxation rules apply. The taxation of trusts and their beneficiaries depends on whether the trust is classified as a specific (or determinate) trust or a discretionary (or indeterminate) trust. Under Indian tax law, tax is levied at only one level—either at the trust level or at the beneficiary level: In this case, the fund would likely qualify as a specific trust, since each investor's share in income and capital is known. However, an explanation under Indian tax law requires that such shares be explicitly specified in the trust deed as on the date of its creation. Citing this, tax authorities have often classified similar investment trusts as discretionary trusts, despite court rulings to the contrary. To avoid potential litigation, the fund may choose to classify itself as a discretionary trust. Tax rates and treatment As a discretionary trust, the fund will be taxed at the trust level at the maximum marginal rate. However, courts have ruled that special incomes like capital gains or dividends will still be taxed at their applicable preferential rates: Long-term capital gains: 12.5% + surcharge + cess = ~14.95% Dividends: 30% (with surcharge capped at 15%) = ~35.88% Interest and other income: taxed at the highest marginal rate For investors, any income distributed by the trust is tax-exempt, and hence not subject to TDS. However, unlike regular mutual funds where the net asset value (NAV) is calculated without accounting for tax impact, this fund must factor in potential tax liabilities while determining its NAV. Specifically, it must provision for taxes that would arise if the investments were sold at the current NAV. If this is not done, investors who exit before sale of investments by the Fund would not bear their share of the tax payable by the Fund. Also read: Global investing through GIFT City: What a keen investor should know about Need for clarity Since this retail fund format under IFSCA is new, there is no explicit taxation guidance under the Indian Income Tax Act. To avoid confusion and potential disputes, it may be prudent for the government to amend tax laws to provide clear, fund-specific rules. A well-defined tax framework would reduce ambiguity and boost investor confidence in GIFT City's evolving retail fund offerings. Gautam Nayak is a partner at CNK & Associates LLP. Views are personal.
