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Cross-Border

GIFT City AIF vs Offshore Funds for Investing Into India

Offshore funds rely on tax treaties. A GIFT City Category III AIF can rely on Indian law itself, and from 2026 its tax holiday runs for 20 years out of 25. So why are most inbound funds still offshore?

By Suril Mehta, CA, Partner, K C Mehta & Co LLP | KCM Consultants LLC, Dubai

Published 11 November 20266 min

Key Takeaways

  • Offshore funds in Mauritius, Singapore or the DIFC rely on treaty benefits, which after the Supreme Court’s Tiger Global ruling (January 2026) need real substance and a genuine purpose.
  • A Category III AIF in GIFT City (IFSC) has two Indian-law routes: the IFSC unit deduction in section 147 of the Income-tax Act, 2025 (formerly section 80LA), and the fund exemptions in Schedule VI.
  • The Finance Act, 2026 extended the IFSC deduction from 10 consecutive years out of 15 to 20 consecutive years out of 25, from tax year 2026-27.
  • Section 147 arguably covers dividends, interest and capital gains of a Category III AIF. Many advisers take a narrower view, so few funds rely on it, and almost none is set up as a company.
  • Category I and II AIFs are pass-through vehicles. For inbound investment they offer no tax edge over offshore funds; their use is mainly outbound.

The offshore baseline

Most offshore fund structures, whether in Mauritius, Singapore or the DIFC, share two features: the fund itself is exempt or lightly taxed at home, and a tax treaty reduces Indian tax on dividends, interest and gains on some instruments. Gains on Indian shares are now taxable in India under most treaties, so the treaty advantage is narrower than it once was.

The Tiger Global ruling raised the bar further. A tax residency certificate is necessary but not enough, and India’s general anti-avoidance rules can deny treaty benefits where obtaining them is a main purpose of the structure. See DIFC Variable Capital Company for Investing Into India.

GIFT City: two Indian-law routes

Route 1: the IFSC unit deduction (section 147)

Section 147 of the Income-tax Act, 2025 replaces section 80LA. It gives an IFSC unit a deduction of its eligible income for a block of years of its choosing. From tax year 2026-27, the Finance Act, 2026 extended that block from 10 consecutive years out of 15 to 20 consecutive years out of 25.

The open question is whether a fund’s dividends, interest and capital gains are income the deduction covers. Conservative advisers argue that the provision reaches business income from approved activities, not passive investment income. The better reading is that the language supports covering all three, and that the hesitation comes from regulatory uncertainty, not the text. A CBDT clarification would settle it. Until then, most GIFT City AIFs do not claim it.

To use section 147 fully, the fund would be set up as a company, so that income is taxed (and deducted) at fund level. Few, if any, GIFT City AIFs are companies today.

Route 2: the Schedule VI fund exemptions

Schedule VI to the 2025 Act exempts specified income of a “specified fund”: broadly, a Category III AIF registered with SEBI or under the IFSCA Fund Management Regulations, 2022, whose units are held by non-residents. Limited exceptions allow units held by the sponsor or manager, by resident investors who were non-resident when they invested, and resident units up to 5% of the total.

The exemption is clearer than section 147, but narrower:

Income of the specified fund Exempt under Schedule VI?
Gains on securities transferred on an IFSC stock exchange Yes, to the extent of non-resident units
Gains on securities other than shares of Indian companies Yes
Gains on shares of Indian companies (off the IFSC exchange) No, outside this entry
Income from securities issued by non-residents Yes

For the investor, income received from a specified fund, or on transferring its units, is exempt (Schedule VI, unit holder entry).

Side by side

Offshore fund (Mauritius, Singapore, DIFC) GIFT City Cat III AIF: Schedule VI GIFT City Cat III AIF: section 147 (company) GIFT City Cat I/II AIF
Basis of relief Treaty Indian domestic law Indian domestic law Pass-through
Gains on Indian shares Generally taxable in India under current treaties Not covered by the securities entry Deducted, on one reading of section 147 Taxed in investors’ hands
Dividends and interest Treaty rates Limited Deducted, on one reading Taxed in investors’ hands
Investor-level tax in India None on distributions Exempt Depends on structure Pass-through
Main risk Treaty access, GAAR, substance Narrow scope; unit holder conditions Interpretation of section 147 No inbound advantage

What it means for an investor

A non-resident investing through a GIFT City Category III AIF set up as a company, and claiming section 147, could see the fund’s Indian income relieved for up to 20 years and distributions exempt in India. Many home countries have a participation exemption for companies holding 5% or more, so the distribution can also be exempt at home. That chain is strong on paper. It rests on a reading of section 147 that is not yet the market view.

What to do

  • Decide which income the fund will mainly earn: gains on Indian shares, other securities, dividends or interest. The answer points to the route.
  • If relying on section 147, set the fund up as a company and document the reading taken.
  • If relying on Schedule VI, monitor the unit holder conditions every year.
  • For offshore funds, test treaty access after Tiger Global: substance, management and purpose.
  • For US investors, remember that a GIFT City fund is generally a PFIC. See PFIC Tax on Indian Mutual Funds.

FAQ

What replaced section 80LA from April 2026?
Section 147 of the Income-tax Act, 2025. The Finance Act, 2026 also extended the holiday to 20 consecutive years out of 25.

What replaced section 10(4D)?
The fund exemptions now sit in Schedule VI to the 2025 Act, for “specified funds” whose units are held by non-residents, with limited exceptions.

Are gains on Indian company shares exempt for a GIFT City Category III AIF?
Not under the Schedule VI entry for securities, which excludes shares of Indian companies. They are arguably covered by the section 147 deduction, but the point is not settled.

Why are there no GIFT City AIFs set up as companies?
Mainly because the section 147 route is uncertain, and a trust or LLP structure is more familiar to fund managers. A company structure is what the section 147 route would need.

Talk to KCM about fund structures for investing into India: contact us.

Sources and last checked: 9 November 2026

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.

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