The International Financial Services Centres Authority (IFSCA), the regulator for GIFT City, has recommended the introduction of a clear outbound investment tax regime to the central government, according to two people with direct knowledge of the matter. The recommendation has been submitted to the finance ministry as part of its inputs for the Union Budget for FY27.
The proposal seeks to address a key constraint facing the fund management ecosystem at GIFT City. While regulations already permit outbound investments from the International Financial Services Centre (IFSC), there is no dedicated tax framework governing such investments. As a result, outbound investments made from GIFT City can attract taxes of more than 40%, making them unattractive for large global funds.
“While the regulatory regime for outbound investment is already in place, representations have been filed before the government to issue a clear tax regime for outbound investment from GIFT City in the Union Budget for FY27,” said the first person cited above.
In the context of GIFT City, an outbound tax regime refers to a predictable taxation framework for investments made by IFSC-based funds into overseas markets. Currently, the absence of clarity means tax can be triggered during frequent buying and selling, or “churning,” of investments within the fund. A defined outbound tax regime would ensure tax neutrality at the fund level, with income taxed only when distributed to investors, bringing GIFT City on par with global financial hubs such as Singapore and Hong Kong.
The issue is particularly relevant for large foreign funds that operate regional trading desks to execute investments across multiple jurisdictions. Typically, major American funds set up regional headquarters in centres such as Singapore or Hong Kong, from where investments across Asia and Southeast Asia are executed. GIFT City was created to compete with these jurisdictions, many of which offer well-established outbound investment tax regimes.
Emails sent to the IFSCA and the finance ministry seeking comment remained unanswered.
“Right now, due to a lack of tax regime, individuals investing in outbound funds from IFSC are facing a high tax rate of 42.74% at the time of churning of investments by the outbound fund in IFSC,” said the second person cited above. Churning refers to the high frequency of buying and selling of securities by a fund.
“On the other hand, for outbound investments from funds based in Singapore, income is taxed only when it is received by the investor in India and not at the time of churning of investments by the Singapore funds. To make investments from GIFT City more attractive, a clear tax regime on par with investments made from Singapore is required,” the second person added.
Tax efficiency has been one of the core selling points of GIFT City, with the government offering several incentives to funds and offshore entities operating from the IFSC. These include exemptions on capital gains tax and interest income earned by funds, along with limited tax benefits for banks issuing loans from GIFT City.
At present, GIFT City is being used largely by global entities to route India-focused investments, particularly in the debt segment. Debt transactions such as External Commercial Borrowings (ECBs) and Non-Convertible Debentures (NCDs) have seen total debt listings at GIFT City touch $66 billion as of the end of the September quarter, official data showed. Some funds have also launched Foreign Portfolio Investment (FPI) and Alternative Investment Fund (AIF) vehicles from the IFSC. There are currently 310 funds registered at GIFT City, which together have raised commitments worth $26 billion.
