Ravish Bhatt | Partner, R & D Law Chambers LLP | giftcitylawyers.com
When India’s Supreme Court issued its Tiger Global judgment on 15 January 2026, the immediate instinct of many cross-border fund managers and MNCs was to reconsider their India strategy. A structure that had worked for a decade suddenly carried a question mark.
There is, however, an India-based alternative that has been maturing quietly for several years and whose credibility has increased substantially in the post-Tiger Global environment. GIFT City’s International Financial Services Centre (IFSC) in Gujarat is not a workaround or a tax shelter. It is a domestic Indian jurisdiction with a statute-backed tax architecture that does not depend on treaty entitlement, and does not expose a structure to general anti-avoidance scrutiny on the same terms as a Mauritius or Singapore conduit, and has just received a significant upgrade in its flagship tax incentive.
This article sets out what that tax architecture actually provides, where its limits are, and what practitioners and investors need to understand before treating GIFT City as a solution.
The Core Tax Holiday: Section 80LA / Section 147
The flagship incentive for IFSC units is a 100% income-tax deduction on eligible business income. Under the Income Tax Act 1961, this was Section 80LA. Under the Income Tax Act 2025 (in force from 1 April 2026), the provision is carried forward as Section 147.
Under the previous framework, an IFSC unit could elect a 100% deduction for any 10 consecutive tax years out of a 15-year block, commencing from the year in which it obtains its IFSCA registration. Offshore Banking Units (OBUs) of scheduled banks or foreign banks in Special Economic Zones qualify for a 100% deduction for 10 consecutive tax years without the election mechanism.
The Finance Act, 2026 significantly extends this window: 20 consecutive years out of a 25-year block for IFSC units, and 20 consecutive years for OBUs. This gives new entrants a longer runway and existing units that have not yet commenced their election period substantially more certainty than the prior framework offered. Such provisions of the 2026 Act reflect the government’s stated intention to give GIFT City’s financial infrastructure the same long-term policy certainty that has made competing international financial centres in Singapore and the UAE attractive to institutional capital.
After the holiday period, business income from IFSC operations will be taxed at a concessional 15% rate, aligned with the OECD’s Pillar Two minimum rate floor. This matters for multinationals whose home-country Pillar Two legislation includes a top-up tax for foreign subsidiaries effective below 15%: income from an IFSC unit at the post-holiday rate does not generally trigger that top-up in most implementing jurisdictions.
| Who qualifies: IFSC Banking Units (IBUs); Fund Management Entities (FMEs) registered under the IFSCA (Fund Management) Regulations; capital market intermediaries; insurance and reinsurance offices; aircraft and ship leasing entities; treasury and finance companies. All must hold valid IFSCA authorisation and derive eligible income in convertible foreign exchange.Form requirement: Previously Form 10CCF; now Form 35 under the 2026 Rules, to be certified by a Chartered Accountant and filed with the income-tax return. |
Capital Gains and Non-Resident Income Exemptions
Beyond the entity-level holiday, the Indian statute provides a layered set of exemptions that operate specifically in the IFSC context for non-resident investors and certain fund vehicles. These are distinct from the Section 147 deduction and operate at the investor level or at the level of income characterisation.
Section 10(4D): Specified Funds
A Category III Alternative Investment Fund (AIF) located in the IFSC, all of whose unitholders other than the sponsor and manager are non-residents, qualifies as a “specified fund” for purposes of Section 10(4D) of the 1961 Act. The income of such a fund from transfer of capital assets listed on an IFSC exchange in foreign currency, from transfer of securities other than shares of an Indian company, from securities issued by non-residents not otherwise accruing in India, and from securitisation trust income, is exempt from income tax to the extent attributable to non-resident unitholders.
This is a significant provision. The fund itself is taxed on certain Indian-source income (shares of Indian companies are not exempt at the fund level), but the bulk of a cross-border portfolio fund’s income from non-Indian securities and IFSC-listed instruments falls outside taxable income. The attribution calculation is made under Rules 21AI and 21AJ of the 1962 Rules, with reporting in Forms 10-IG and 10-IH.
Section 10(23FBC): Investor-Level Exemption
Critically for fund managers structuring products for non-resident investors: Section 10(23FBC) provides that any income accruing or arising to a unitholder of a specified fund, or from transfer of units in the specified fund, is not included in the unitholder’s total income. This means non-resident investors in a qualifying GIFT City Category III AIF are not subject to Indian income tax on their distributions or redemption proceeds from that fund.
This is the investor-level benefit that the IFSC structure delivers. It flows from the domestic statute, not from any treaty. An investor in a GIFT City fund does not need to invoke the India-Mauritius or India-Singapore DTAA to claim exemption from Indian tax on their fund returns.
Section 10(4E): Derivatives Income for Non-Residents
Non-residents’ income from transfer of non-deliverable forward contracts, offshore derivative instruments (ODIs), and over-the-counter derivatives entered into with an IFSC Banking Unit is exempt from income tax. Following the Finance Act 2025, this exemption was extended to income from transactions with Foreign Portfolio Investors operating as IFSC units, effective from 1 April 2026.
Sections 10(4F), 10(4G), 10(4H): Specific Non-Resident Income
Section 10(4F) exempts royalty and interest income of non-residents from leasing of aircraft or ships to IFSC units that commenced operations on or before 31 March 2030. Section 10(4G) exempts income of non-residents from portfolio investment in securities managed through an account with an IFSC Banking Unit. Section 10(4H) exempts capital gains of non-residents on transfer of equity shares of a domestic company being an IFSC unit engaged primarily in aircraft or ship leasing, again with the 31 March 2030 commencement condition.
Section 47(viiab) and (viiad): Not a Transfer
Transfer of bonds, GDRs, rupee-denominated bonds, derivatives, and notified securities by a non-resident on an IFSC exchange in foreign currency is not treated as a “transfer” for capital-gains purposes under Section 47(viiab) of the 1961 Act. A tax-neutral relocation of an offshore fund to an IFSC resultant fund is separately provided for under Section 47(viiad), with the sunset extended to 31 March 2030 and the scope expanded to include retail schemes and exchange-traded funds following the Finance Act 2025.
MAT, AMT, and Transaction Taxes
Corporate IFSC units are subject to a reduced Minimum Alternate Tax (MAT) rate of 9% under Section 115JB(7) of the 1961 Act, compared to the standard 15% (now 14% under the Finance Act 2026) for other companies. Non-corporate IFSC units face a reduced Alternative Minimum Tax (AMT) of 9% under Section 115JC. Under the Income Tax Act 2025, both provisions are unified in Section 206, which preserves the 9% rate for IFSC units deriving income solely in convertible foreign exchange.
Transactions executed on IFSC exchanges attract no Securities Transaction Tax, no Commodities Transaction Tax, and no stamp duty. Gujarat has separately waived stamp duty on real-estate transactions in the GIFT City precinct. For institutional investors running high-turnover strategies, the STT saving alone can be substantial.
GST and Customs
Services imported by an IFSC unit for authorised operations are exempt from Integrated GST under the zero-rating framework for Special Economic Zone units. Services supplied by an IFSC unit to offshore clients are treated as exports and are zero-rated. Transactions on IFSC exchanges do not attract GST.
As an SEZ unit, an IFSC entity may import capital goods, equipment, and office consumables for authorised operations free of Basic Customs Duty and associated levies. Compensation cess on SEZ imports for authorised operations was exempted by notification in 2024, addressing a prior anomaly.
What GIFT City Does Not Do: The Treaty Reality
A point that is frequently misunderstood, and that practitioners must state clearly to clients.
An IFSC fund or unit is an Indian tax resident under the Income Tax Act. Its status as “offshore” under the Foreign Exchange Management Act (FEMA) is a regulatory characterisation for exchange-control purposes; it does not affect its treaty status for income-tax purposes. The benefits available to an IFSC unit flow from Indian domestic statute, not from India’s treaty network.
What this means for investors: a foreign investor in a GIFT City fund does not gain treaty access to India’s DTAA network through the fund. Each investor’s own treaty position with India is determined by their own residency and the applicable bilateral agreement. The IFSC structure substitutes statutory certainty for treaty dependence, which is a materially different value proposition.
The correct framing for investors is this: the Section 10(23FBC) exemption from Indian tax on fund distributions and redemptions is a domestic statutory entitlement that does not require a treaty to be claimed. Investors in a qualifying GIFT City fund need not demonstrate treaty residency, substance in a treaty jurisdiction, or beneficial ownership of treaty-protected income. They benefit from the statutory exemption directly. Post-Tiger Global, this is the cleaner position.
| The post-Tiger Global context: The Supreme Court’s 15 January 2026 judgment in Authority for Advance Rulings v. Tiger Global International II Holdings confirmed that a Tax Residency Certificate is necessary but no longer sufficient to establish treaty entitlement. The Court confirmed that GAAR applies notwithstanding the treaty’s beneficial treatment rule. GIFT City’s statute-based benefits are not subject to GAAR in the same way: a 100% deduction under Section 147 or an exemption under Section 10(23FBC) is a positive statutory entitlement, not a treaty benefit that can be denied on substance or avoidance grounds. |
Substance: The Non-Negotiable Condition
GIFT City’s statutory benefits do not come without a condition that is both real and actively enforced. Every IFSC unit must derive its eligible income from genuine operations conducted from within the IFSC. Income must be received in convertible foreign exchange. The entity must hold a valid IFSCA registration and conduct the activity for which it is registered.
For Fund Management Entities, the IFSCA (Fund Management) Regulations require that investment decisions be made by personnel physically based in the IFSC. Following inspections in 2025 & 2026, the IFSCA initiated regulatory action against multiple FMEs whose offices were found unattended or whose key management personnel were absent. The regulator cited breaches of Regulations 7(5) and 10(1) of the IFSCA (Fund Management) Regulations 2025, referencing absent principal officers, inadequate infrastructure, and investment decisions made remotely.
This is not incidental enforcement. It reflects the IFSCA’s awareness that GIFT City’s credibility as an international financial centre depends on the substance of operations, and that paper-presence structures undermine the jurisdiction’s global positioning.
The practical implication is identical to the substance message that Tiger Global drove home for treaty-dependent structures: build genuine operations first, and the benefits follow. The difference is that in GIFT City, the benefits flow from domestic statute once substance is established, rather than from a bilateral treaty that requires continuous documentation of residency, beneficial ownership, and commercial rationale.
Section 9A: The Fund Manager Safe Harbour
A provision directly relevant to offshore fund managers considering a GIFT City presence: Section 9A of the 1961 Act (Schedule I of the 2025 Act) provides that investment management by an eligible fund manager in India on behalf of an eligible offshore fund does not constitute a “business connection” of the offshore fund in India, and does not give rise to Indian taxation of the offshore fund’s income, even though investment decisions are made in India.
For fund managers based in GIFT City, the Finance Act 2025 extended the Section 9A sunset to 31 March 2030 and relaxed several conditions that had previously limited adoption. CBDT has separately notified that certain conditions under Section 9A(3) do not apply where the eligible fund manager is located in the IFSC. This means a Singapore- or Cayman-based fund can have its portfolio managed by an IFSC-based FME without triggering Indian taxation of the offshore fund, while the FME itself benefits from the Section 147 holiday on its management fee income.
A Practical Summary by Entity Type
| Entity Type | Primary Benefit | Key Condition |
| Category III AIF (specified fund) | Section 10(4D) exemption on fund income; Section 10(23FBC) investor-level exemption; Section 147 deduction on management fee income of FME | All unitholders (other than sponsor/manager) must be non-residents; income attributed to non-resident holders only |
| IFSC Banking Unit / OBU | Section 147 deduction for 20 consecutive years (as applicable); 9% MAT; concessional withholding on interest paid to non-residents | Income from IFSC-approved banking activities only; received in convertible foreign exchange |
| Aircraft / Ship Leasing Entity | Section 147 deduction; Section 10(4F) exemption for non-resident lessors; Section 10(4H) on sale of leasing company shares | Operations commenced on or before 31 March 2030 |
| Global / Regional Treasury Centre | Section 147 deduction on eligible income; no STT/CTT on IFSC exchange transactions | Income from approved treasury activities; convertible foreign exchange; note post-Budget 2026 deemed-dividend treatment |
| Capital Market Intermediary | Section 147 deduction; no STT/CTT/stamp duty; Section 10(4E) for non-resident counterparties on ODIs/NDFs | IFSCA registration as broker/custodian/investment adviser; operations from IFSC |
The Limits: What to Watch
Three conditions deserve emphasis before any structure is designed around GIFT City benefits.
Capital gains on Indian company shares are not exempt at the fund level. Section 10(4D) exempts certain securities income but expressly excludes gains from transfer of shares of Indian companies. An IFSC fund with a significant Indian equity portfolio will be taxed on those gains under Section 115AD at the concessional FPI rate, not exempt. This is a material constraint for India-focused strategies.
The convertible foreign exchange condition is strict. The Section 147 deduction, 9% MAT, and several other IFSC-specific benefits are conditioned on income being received in convertible foreign exchange. Rupee-denominated income from IFSC activities does not qualify. IFSC units must structure their billing and collection accordingly.
Pillar Two interaction requires jurisdiction-specific advice. The post-holiday 14% concessional rate is designed to be at or above the Pillar Two minimum. However, the interaction depends on how each investor’s home jurisdiction implements Pillar Two, the treatment of the Section 147 deduction during the holiday period, and the availability of Substance-Based Income Exclusions. Investors from implementing jurisdictions should model this explicitly before reliance.
The Larger Point
GIFT City IFSC is not a tax shelter. The phrase was used in a headline following the Tiger Global judgment and it mischaracterises what the jurisdiction offers. A tax shelter is a structure that hides income or exploits a mismatch. GIFT City is a jurisdiction with transparent, statute-backed incentives designed to attract genuine financial sector activity to India.
The distinction matters legally, commercially, and reputationally. A fund manager who builds a genuine IFSC presence, makes real investment decisions from GIFT City, and claims Section 147 and Section 10(4D) benefits is doing precisely what the legislature intended. That is a materially different position from a Mauritius holding company whose beneficial owners and decision-makers are elsewhere.
Post-Tiger Global, the market’s instinct to look more seriously at GIFT City is correct. The statutory framework is there. The regulatory infrastructure is maturing. The tax incentives are substantial and becoming more durable. What makes the difference is whether the entity operates genuinely from within the IFSC or not. The IFSCA has made clear it will enforce that condition.
For practitioners advising on India-facing structures, cross-border fund formation, treasury management, or aircraft leasing, a GIFT City analysis is now a standard part of the engagement, not an afterthought. For further information on GIFT City IFSC advisory, fund structuring, regulatory compliance, and cross-border tax planning from our dedicated GIFT City practice, see www.giftcitylawyers.com. For international tax, treaty entitlement, and APA and MAP advisory, see https://rdlawchambers.com/our-services/
| Disclaimer: Statutory note: References throughout this article are to the Income Tax Act, 1961 and Income Tax Rules, 1962 unless otherwise stated. The Income Tax Act, 2025 and Income Tax Rules, 2026 came into force on 1 April 2026 and carry forward the relevant provisions in materially identical terms with updated section numbering, as noted in the text. This article is for general informational purposes and does not constitute legal or tax advice. Readers should seek specific professional advice before acting on any matter discussed herein. |