Where the rich are going: All about setting up a family office in GIFT City

The financial services hub gives tax breaks and opportunities to make investments

Gujarat International Finance Tec-City (GIFT) in Gujarat may soon have its first family investment fund (FIF), 'Business Standard' recently reported. "GIFT International Financial Services Centre (IFSC) has emerged as a prominent destination for financial activities. GIFT IFSC has emerged as a prominent destination for financial activities," says Pallav Pradyumn Narang, partner at CNK.

The number of Indians with a net worth of more than $1 million rose from 100 in 2012 to 1,103 in 2022, according to the IIFL Wealth Hurun India Rich List. A 2022 survey by EY found that 43 per cent of Indian family offices have been established in the past five years. "Individuals and families in India are becoming sensitive and more aware of the importance of monitoring and managing their wealth. Data suggest the family office concept is gaining traction in India," says Kunal Sharma, counsel, GIFT City.

A family office is a private investment and wealth management advisory company that serves ultra-high-net worth individuals (HNWIs). "It provides a wide range of services tailored to meet the needs of HNWIs. It also handles non-financial issues, It may either be single-family office, multi-family office or virtual family office," says Rubal Bansal Maini, partner, Luthra and Luthra Law Offices India. A family office also provides governance, household management, philanthropy, succession planning, legal and tax assistance.

"Family offices not only provide services in India, but also provide services for NRI families who have moved to other countries and are looking for investment opportunities in India," says Jinal Mehta, certified financial planner (CFP) and founder of Beyond Learning Finance.

A family office is primarily structured as a trust and therefore its taxation is done accordingly. "Also, companies and LLPs have been used to set up family offices, but these come with their own logistical and tax issues," says Narang.

What is FIF

The rich are setting up or expanding family offices abroad to take advantage of a favorable business environment, tax incentives and access to international markets. "It is evident that Indian families are becoming increasingly proactive in diversifying their investment portfolios and exploring global opportunities," says Roopal Bajaj, leader - Funds, Singhania & Co.

GIFT City IFSC is catching the attention of Indian families as a potential base for global investment operations. "GIFT IFSC aims to facilitate on-shoring of offshore transactions and provide financial services that adhere to international standards," says Bajaj

GIFT IFSC has introduced FIF to facilitate family office investments. "Basically, FIF is a self-managed fund set up in the IFSC for pooling money from a single family. FIFs can be set up as a company or an LLP or a contributory trust in the Gift IFSC. The limited purpose of the FIFs is to act as a family investment vehicle and to facilitate permissible portfolio investments outside India by such funds," says Suresh Surana, founder, RSM India.

Taxation of FIF

Under the Income Tax Act there are provisions to provide for tax neutrality on capital gains arising in case of relocation of offshore funds in the IFSC, where the transfer of assets have taken place on or before March 31, 2025.

Other taxation aspects will be subject to the form of the entity, namely, sole proprietorship firms, partnership firms, LLPs, trusts, companies, or a body corporate. "For instance, income of a determinate trust is subject to tax in the hands of the trustees, acting in their representative capacity. However, any foreign sourced income is only taxed in the hands of the trustees to the extent it is attributable to Indian resident beneficiaries," says Sharma. FIFs structured as LLPs or companies would be taxed according to LLP or company rates, respectively. However, in the case of an LLP, there would be no additional tax on repatriation of profits.

FIF will be treated as an ‘Indian resident’ for the purpose of income tax laws. Bajaj explains that FIFs set up in GIFT IFSC are treated as Indian residents for tax purposes and foreign residents, offshore units from an exchange control perspective, and Regarding tax reporting requirements, FIF qualifying as Indian tax resident, would be required to disclose details of foreign assets held by it, under Schedule FA of its Income Tax Return.

"FIFs are entitled to a 100 per income tax exemption for a period of 10 consecutive years out of 15 years, coupled with GST exemption," says Sharma.

While IFSC may allow some flexibility for FIFs to invest in physical assets as part of a larger portfolio, an FIF solely for investment in physical assets for personal use may not be permitted. Mehta says, "Similarly, FIFs created to fund overseas associates or group companies may also not be allowed. Additionally, it is not permissible to invest back into India through an FIF that is funded from India."

The decision to set up a family office is a long-term one. "Once the funds are set up and invested from a jurisdiction, it is not possible to move them easily on account of various factors and the regulations in GIFT city are fairly new, and the corpus requirements are fairly high. The taxation of such investment needs more clarity and certainty, says, "Ankit Jain, partner, Ved Jain & Associates

Others believe this is a good opportunity. "It is a great opportunity for the family offices, globally or within India, to form FIF and invest in the SEZ areas, including the GIFT City, and enjoy the 100 per cent income tax exemptions for 10 consecutive years within a 15 year period," says Maini.

if a family moves money to a self-managed FIF in GIFT City, will it be considered overseas direct investment? Or, should it be categorised as 'overseas portfolio investment' (OPI)? There's no clarity as of now.

"The tax holiday is available for business income in Gift City. Many assumed that capital gains on investment by FIIs will be exempted even if it's capital gains and not business income. That may not be the case, it's a grey area as of now. More clarity is needed," says the chief executive officer of a family office based in Mumbai.

Relocating family offices to GIFT City within the IFSC framework can provide substantial regulatory and tax benefits, making it an attractive option for UHNIs and affluent families seeking to optimize their wealth management and investment strategies. "The decision to migrate to GIFT City should be driven by a comprehensive understanding of the benefits and a thorough assessment of how they align with the family's financial aspirations and legacy planning," says Sumit Kochar, managing partner at Dolce Vita Advisors.