NRIs who invest in India through AIFs set up in Gift City get tax exemption

A non-resident investor's income from offshore investments that go through an Alternate Investment Fund set up in an International Financial Services Centre will not be taxed.

Legally, the IFSC is considered a jurisdiction separate from the rest of India, that provides financial services in foreign currency.

The July 12 circular from the Central Board of Direct Taxes was a clarification on a notification issued by the board in 2019, in which it notified that a non-resident investor’s income from investments made outside India through a domestic investment fund will not be taxed. 

As per the provisions of the Income Tax Act, 1961, non-resident or foreign companies generating income chargeable under this Act through investments in IFSC-based investment funds, including Alternative Investment Funds (AIFs) registered in GIFT City, are exempt from filing income tax returns in India, provided that the income tax due on such earnings has been deducted at the source and remitted to the Central Government by the respective investment fund.

 

With the latest amendment, the  definition of the said investment funds has been expanded to include AIFs registered in the IFSC located in GIFT city India.  

AIF is a privately pooled vehicle that puts in funds for the purpose of investments for the benefit of its investors.

"The primary objective of this notification is to bolster the attractiveness of investing in IFSC funds, particularly those established in GIFT City, India. By providing a tax exemption for non-resident or foreign investors, subject to the fulfillment of the stipulated conditions, the Indian government aims to encourage greater foreign investment flows into the IFSC ecosystem, fostering a conducive environment for financial growth and establishing GIFT City as a premier global investment destination," said  Pallav Pradyumn Narang, Partner, CNK.

The move has also been seen as promoting GIFT City as a preferred destination for global investors to set up their India-focused funds. Currently several global investors backing Indian startups set up shop in  well-known tax havens like Singapore, Mauritius or the Cayman Islands.

Take the example of a US company, Say ABC Inc., decides to invest in an Alternative Investment Fund (AIF) registered in GIFT IFSC. Thanks to the recent tax exemption amendment, ABC Inc. qualifies for exemption from filing of tax returns on its earnings from the AIF, provided that the IFSC-based AIF deducts and remits income tax at the source to the Central Government and ABC inc does not have any other incomes in India. 

Without this exemption, ABC Inc. would have been required to go through the process of filing an income tax return in India, leading to additional compliance costs.

"An earlier notification ( SO 2672 (E)) allowed a foreign investor investing in a category I or II AIF in India to not file a return of income in India provided the tax due on such investments was deducted by the fund and paid to the government and the investor had no other incomes in India. This benefit has been extended to AIF funds registered in GIFT IFSC to make it a more attractive destination for investors," explained Narang.