NRIs who invest in India through AIFs set up in Gift City get tax exemption
Non-resident clients’ income from foreign assets that pass via an Alternate Investment Fund established in an International Financial Services Centre is not taxed.
Legally, the IFSC is distinct from the rest of India in that it provides foreign currency banking services.
On July 12, the Central Board of Direct Taxes issued a memo clarifying a notice it issued in 2019. The board said in that announcement that a non-resident investor’s income from investments made outside India via a domestic investment fund is not taxed.
Non-resident or foreign companies that earn income taxable under this Act through investments in IFSC-based investment funds, such as Alternative Investment Funds (AIFs) registered in GIFT City, are exempt from filing income tax returns in India, according to the Income Tax Act of 1961, as long as the income tax due on such earnings is deducted at the source and sent to the Central Government by the respective investment fund.
The definition of these investment funds has recently been expanded to include AIFs listed in the GIFT city, India, IFSC.
AIF is a private pool of money used to make investments for the benefit of those who contribute to it.
“The primary goal of this notice is to make investing in IFSC funds, particularly those based in GIFT City, India, more appealing.”
The Indian government intends to promote more international investment into the IFSC ecosystem by exempting non-resident or foreign investors from paying taxes as long as certain requirements are satisfied. According to Pallav Pradyumn Narang, Partner at CNK, this would create a favourable atmosphere for financial development and make GIFT City the finest destination in the world to invest.
People also believe that this decision would make GIFT City a more appealing location for overseas investors looking to establish India-focused funds. Several overseas investors that support Indian companies have established themselves in well-known tax havens such as Singapore, Mauritius, and the Cayman Islands.
Assume ABC Inc., a US business, wishes to invest in an Alternative Investment Fund (AIF) established in GIFT IFSC. ABC Inc. does not have to submit tax returns on the money it earns from the AIF, thanks to a recent reform, as long as the IFSC-based AIF deducts and transfers income tax to the Central Government at the source and ABC Inc. does not make any other money in India.
Without this exception, ABC Inc. would have had to submit an income tax return in India, which would have increased their operating expenses.
“A previous notice (SO 2672 (E)) stated that a foreign investor who invested in a category I or II AIF in India was not required to report income in India as long as the tax due on such investments was taken out by the fund and paid to the government and the investor had no other income in India.”
This incentive has been granted to AIF funds listed in GIFT IFSC in order to make it more enticing to investors,” Narang said.
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