AIFs In The GIFT City - An Introduction
- Introduction
- What Are Alternative Investment Funds (AIFs)?
- Types Of AIFs & How They Operate In GIFT IFSC
- Key Advantages Of Investing In AIFs At GIFT City
- Tax Treatment Of AIFs Within GIFT City
- Conclusion
Introduction
GIFT City (Gujarat International Finance Tec-City) has rapidly emerged as a hub for financial innovation in India, offering a range of cutting-edge investment avenues. Among its many offerings, Alternative Investment Funds (AIFs) have gained significant traction, particularly after the introduction of the SEBI Alternative Investment Funds Regulations, 2012, which also extend to AIFs in the International Financial Services Centre (IFSC).
With GIFT City bringing these funds into the spotlight, AIFs are now playing a pivotal role in diversifying investment portfolios, fostering entrepreneurial ventures, and attracting global capital. Supported by GIFT City’s strategic initiatives and regulatory framework, AIFs are positioning themselves at the forefront of India’s evolving investment landscape.
Through this blog, let us explore the world of AIFs, their various types, and how they operate within GIFT City, as well as the entire ecosystem.
Keep reading to see Alternative Investment Funds (AIFs) from the eyes of GIFT City!
What Are Alternative Investment Funds (AIFs)?
Alternative Investment Funds (AIFs) are privately pooled investments that are further invested in non-traditional assets, like private equity, venture capital, and hedge funds. Although it sounds akin to mutual funds, the primary differentiation is that AIFs may focus more on non-traditional assets and explore more diverse and complex investment strategies.
These funds pool capital from individual and institutional investors, foreign investors, and NRIs. AIFs in GIFT City have gained popularity among High Net Worth Individuals (HNIs), Ultra HNIs, and corporates, with a minimum investment corpus of USD 150,000.
Types Of AIFs & How They Operate In GIFT IFSC
In GIFT City, AIFs are structured to invest primarily in securities denominated in USD ($), with variations based on both their structure and remittance route. Broadly, they can be classified into three categories, and further segmented according to the mode of remittance
Structure-Wise
Depending on the SEBI recommended categories, there are three categories of AIFs, namely;
Category I
With the first category, these funds invest in sectors considered socially or economically desirable, such as startups, SMEs, infrastructure, social ventures, or green energy. Investors, here, enjoy certain regulatory and tax benefits.
Category II
The 2nd category AIFs include private equity funds, debt funds, Funds of Funds (FoF), real estate, and other schemes. More of these funds do not undertake leverage or complex trading strategies.
Category III
Fulfilling the previous exemption, the Category III AIFs focus on leveraging and deploying complex strategies. It includes investments such as hedge funds, long-short funds, and high-frequency trading. This category aims for short-term returns and can invest in listed or unlisted derivatives.
Remittance Route
AIFs in GIFT City include inbound and outbound investments.
Inbound AIFs
These are AIFs where foreign or NRI investors channel capital into India via the GIFT City route. In short, the main source of investment is in USD. Majorly, inbound AIFs enable investments in Indian listed shares, Mutual funds, and similar assets. This capital is deployed into Indian markets or assets, benefiting from a liberalized regulatory and tax framework.
Outbound AIFs
As the name suggests, Outbound AIFs allow resident Indian investors to invest outside India through the Liberalized Remittance Scheme (LRS). Here, GIFT City acts as a gateway for Indian capital to be invested in global markets through regulated fund structures.
With outbound AIFs, you can invest in Offshore Shares, Foreign Securities, Global Emerging Markets, US Markets, US ETFs and much more.
[Bonus fact: There are around 255 AIFs registered on IFSCA (International Financial Services Centres Authority) which invest across all the three Categories]
Key Advantages Of Investing In AIFs At GIFT City
With AIFs in GIFT City, you can avail of numerous benefits, including tax exemption. Read further to discover them.
Lower Operational Costs
GIFT City offers a cost-effective ecosystem for AIF investors. Reduced compliance burden, no GST on management fees for IFSC funds, and access to shared infrastructure help lower fund setup and administration costs.
Tax Efficiency
The most talked-about benefit of AIFs in GIFT City is the tax incentives available. For instance;
→ Capital gains tax for non-residents.→ Dividend distribution tax (DDT).
→ Securities transaction tax (STT)
→ Commodity transaction tax (CTT).
Also, income earned by Category III AIFs (hedge funds) from trading in securities is exempt from tax for Non-resident Indians (NRIs).
Seamless Global Access
Whether you're an NRI investing in India (Inbound AIF) or a resident Indian looking to invest abroad (Outbound AIF), GIFT City serves as a global gateway. With regulated, cross-border capital movement simplified under LRS rules for Resident Indians, investing in offshore securities has been made simpler and accessible to all.
Enhanced Investor Protection
Regulated under the IFSCA framework, there is transparency in global practices, ensuring disclosure and investor-friendly norms.
Tax Treatment Of AIFs Within GIFT City
The tax treatment of Alternative Investment Funds in GIFT City varies by category.
- Business Income Category I, II, and III AIFs are only taxed at fund level.
- Capital Gains & Interest:
- Capital gains, interest, and dividends are taxed at the investor level (pass-through applies).
- NR investors are exempt from tax on income received from the AIF or transfer of units (subject to conditions).
Category Tax Benefit For “NRIs” Category I & II AIFs - Tax pass-through applies; taxed as if directly investing in underlying assets.
- Capital gains, interest, and dividends taxed at the applicable slab or rates.
- Can claim losses against capital gains, subject to holding and set-off rules.
NRIs can avail of; - Pass-through taxation (except business income).
- Offshore income not taxable in India.
- Capital loss claim allowed (if held ≥12 months).
- Tax treaty benefits available.
- No PAN or ITR filing, subject to conditions.
Category III AIF 1. Tax paid at Fund level – FPI (Foreign Portfolio Investment) tax principles apply
2. Exemptions from tax on income from:- Transfer of specified securities (excl. Indian company shares)
- Debt securities, derivatives, offshore securities
- Securities issued by non-residents (not having a PE in India)
- Income from securitization trust (under PGBP)
3. Tax on Indian company shares:- STCG – 20%
- LTCG – 12.5%
4. Other income (interest, dividend) – taxed at 10%NR investors are exempt from: - Tax on income from AIF
- Tax on transfer of AIF units
- PAN and return filing requirements (subject to conditions)
Portfolio/AIF Managers in IFSC 10-year tax holiday on business income. - FMEs - 100% corporate tax exemption for 10 out of 15 years.
- Reduced MAT/AMT at 9%.
- No MAT for companies under the concessional tax regime.
- 10% tax on dividend income for non-resident shareholders.
- No GST on management fees.
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Conclusion
Over the years, AIFs have turned out to be a fruitful investment opportunity for investors. Ranging from private equity funds to venture capital to offshore investments abroad, it covers multiple assets. Additionally, investing in AIFs offers numerous tax benefits to investors. So, if you're an NRI, a Foreign individual, or a Resident Indian, Alternative Investment Funds can be your next charm for your portfolio.
If you wish to step into the world of AIFs, consider consulting an AIF provider for more guidance.
[Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.”]
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