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In the world of finance, where every penny counts, tax exemptions can be the golden ticket for investors. For Non-Resident Indians (NRIs) eyeing investments through Alternative Investment Funds (AIFs) in the Gujarat International Finance Tec-City (GIFT City), the recent amendments to the Income Tax Act, of 1961 bring good news. But how exactly does this work, and what does it mean for investors? Let’s break it down.

The buzz is all about the amendments that make NRIs and foreign companies investing through AIFs in GIFT City eligible for tax exemptions. According to the Income Tax Act, income generated through these investments won’t be taxed, provided the tax due has been deducted at the source and remitted to the Central Government by the respective investment fund. This move is part of a broader effort to position GIFT City as a premier global investment destination and attract foreign investors to the International Financial Services Centre (IFSC) ecosystem.

Decoding Alternative Investment Funds (AIFs):

Before diving into the tax exemptions, let’s understand what AIFs are. AIFs are privately pooled vehicles that channel funds into various investments for the benefit of investors. The recent tax exemption amendment aims to make these funds even more attractive to non-residents, fostering a climate for financial growth.

Now, consider ABC Inc., a US company looking to invest in an AIF registered in GIFT IFSC. Thanks to the recent tax exemption, ABC Inc. qualifies for exemption from filing tax returns on its earnings from the AIF. This comes with a condition—the AIF must deduct and remit income tax at the source to the Central Government, and ABC Inc. should not have any other income in India. This tax break not only simplifies the process for foreign investors but also positions GIFT City as a lucrative investment hub.

Why GIFT City?

GIFT City, located in Gandhinagar, Gujarat, has witnessed a surge in AIFs, specifically catering to NRIs. The tax incentives create a favourable environment for foreign investors, diverting attention from traditional tax havens like Singapore, Mauritius, or the Cayman Islands. The government’s strategy is clear: make GIFT City a go-to destination for global investors setting up their India-focused funds.

Not All Roads Lead to Tax Exemptions:

While NRIs and foreign investors enjoy the perks of low tax rates on investments made in GIFT City, resident Indians don’t share the same privilege. The tax breaks are exclusively tailored for non-residents. Resident Indians can remit money to GIFT City through the Liberalised Remittance Scheme (LRS) but are limited to investing in securities issued by entities outside India. Derivative trading is also a no-go under LRS.

Understanding International Financial Services Centre (IFSC):

GIFT City is India’s first IFSC, operating as a separate jurisdiction from the rest of the country. It deals with financial products and services on an international scale, providing a range of services such as fund-raising, asset management, wealth management, global tax management, and more.

Services Offered by IFSC:

  • Fundraising services for individuals, corporations, and governments.
  • Asset management and global portfolio diversification for pension funds, insurance companies, and mutual funds.
  • Wealth management services.
  • Global tax management and cross-border tax liability optimization.
  • Corporate treasury management operations, including fund-raising, liquidity investment, and asset-liability matching.
  • Risk management operations, such as insurance and reinsurance.
  • Facilitating merger and acquisition activities among trans-national corporations.

A Boost for Indian Startups:

The ripple effect of these tax exemptions is felt in the startup landscape as well. With GIFT City emerging as a preferred destination for global investors, Indian startups find themselves in the spotlight. As global investors set up shop in GIFT City, Indian startups gain access to a broader pool of funding, fostering innovation and growth. The tax incentives contribute to the overall vibrancy of the startup ecosystem.

Resilience in Economic Downturns:

The tax exemptions play a crucial role in bolstering the resilience of the Indian financial system during economic downturns. By attracting foreign investments, especially during challenging times, GIFT City becomes a stabilising force. The tax advantages act as a magnet, drawing in capital that can contribute to economic recovery and mitigate the impact of global uncertainties.

The Role of IFSC in Global Finance:

As India’s first IFSC, GIFT City takes centre stage in the global financial arena. It goes beyond being a tax-efficient hub; it serves as a conduit for international financial services, connecting investors and businesses across borders. The diverse array of services offered by IFSC, from fund-raising to risk management, positions GIFT City as a comprehensive financial hub, fostering global economic integration.

Looking Ahead: Future Prospects and Challenges:

While the recent tax exemptions mark a significant leap forward, challenges and prospects await. Regulatory frameworks, evolving global economic conditions, and ongoing efforts to enhance the infrastructure of GIFT City will shape its trajectory. As the financial landscape continues to transform, GIFT City’s role in facilitating international investments and financial services is poised to grow, presenting both opportunities and challenges for investors and policymakers alike.

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