GIFT City fund tax disclosure rules split Indian asset managers
Conflicting guidance from Indian fund houses on whether GIFT City holdings qualify as foreign assets is creating compliance risks for investors facing potential tax penalties.
Asset managers in India are offering contradictory guidance to investors on how to declare holdings in GIFT City funds, exposing retail clients to a regulatory grey area ahead of tax filing deadlines. Parag Parikh Financial Advisory has told clients to report its two outbound GIFT funds as "foreign assets" in their income tax returns. Rival fund house DSP takes the opposite view, arguing in a client FAQ that such investments do not belong in the Foreign Assets (FA) schedule because the funds are domiciled in India.
The confusion stems from the unique status of the International Financial Services Centre (IFSC). Under the Income Tax Act, IFSC funds are classified as Indian tax residents. However, for foreign exchange purposes, the Reserve Bank of India and the Foreign Exchange Management Act treat them as overseas investments. Furthermore, investing in a GIFT City fund reduces an individual's Liberalised Remittance Scheme limit, muddying the jurisdictional waters.
Since 2012, Indian residents have been mandated to disclose foreign securities, properties, and offshore trusts in the FA schedule of their tax returns. This requirement carries significant operational weight. Filing the FA schedule forces taxpayers to use a more detailed return form and sharply increases the risk of scrutiny from the tax department. Conversely, failing to disclose a foreign asset or filing incorrect information carries strict penalties.
Conflicting expert opinions
Tax professionals are just as divided as the fund houses. Rajesh Gandhi, a partner at Deloitte, advocates a conservative approach. "While the I-T Act does not expressly address the treatment of investments in GIFT City funds for this purpose, IFSC funds present a regulatory dichotomy," Gandhi said. He noted that because Indian entities report these same investments as foreign assets in their annual RBI foreign assets and liabilities returns, taxpayers should follow suit.
Rajesh Shah, a partner at Jayantilal Thakkar & Co, echoed this caution. He pointed out that GIFT City bank accounts should also be treated as foreign assets because remittances fall under the LRS framework and banks collect tax collected at source on them. "It's wiser to disclose the way I-T department thinks rather than take a bold approach of not disclosing under FA schedule," Shah said.
Ashish Karundia, a chartered accountant, aligned with DSP's interpretation. "The fact that GIFT City is treated as a foreign jurisdiction under forex regulations doesn't mean the same automatically applies under I-T Act," Karundia said. He argued that a legal fiction created for foreign exchange rules cannot automatically extend to tax law without explicit statutory provision.
The impasse is forcing intermediaries to step back. Harsh Thakkar, a fund distributor, noted that distributors are advising clients to seek independent tax counsel rather than relying on fund house guidance. The uncertainty extends beyond retail mutual funds to alternative investment funds, venture capital funds, and portfolio management services operating out of GIFT City. Industry officials said investors have appealed to the IFSC Authority to intervene and secure a formal clarification from the income tax department.
