Every week, someone in our WhatsApp community asks: "Should I put everything into GIFT City?"
Our answer is almost always the same: "Probably not."
At Belong, we've built our platform around GIFT City products. We believe in them. But we've also seen NRIs lose money, face unexpected taxes, or simply pick the wrong product for their situation.
GIFT City is excellent for the right investor. The tax efficiency is genuine. The USD denomination solves real problems.
The regulatory framework is credible. But "excellent for some" doesn't mean "right for everyone."
This guide covers six situations where GIFT City might not be your best option. If any of these describe you, pause before investing. The alternative might serve you better.
Situation 1: You're a US-Based NRI
This is the clearest case where GIFT City loses its appeal.
The marketing says "tax-free returns." For US-based NRIs, that claim largely falls apart due to PFIC rules.
PFIC stands for Passive Foreign Investment Company. Under US tax law, most foreign mutual funds qualify as PFICs, including nearly all GIFT City mutual funds.
When you hold a PFIC, the IRS requires annual Form 8621 filings for each fund you own. The IRS estimates this form takes 36 hours per year to complete properly (Source: IRS).
But the paperwork isn't the worst part.
PFIC taxation works differently from regular capital gains. You're taxed on notional unrealized gains each year, even if you haven't sold anything.
If you don't make proper elections, the IRS applies the "excess distribution" method, which taxes your entire gain at the highest possible rate plus interest charges going back to each year you held the investment.
One US-based NRI in our community ran the numbers. PFIC treatment would cost him more in taxes and compliance than simply investing in US-based India ETFs like iShares MSCI India ETF (INDA) or WisdomTree India Earnings Fund (EPI).
👉 Tip: Some AIFs structured as partnerships might avoid PFIC classification. But this requires careful structuring and expert advice. Don't assume. Verify with a US tax advisor specializing in international investments.
What US NRIs should consider instead:
US-listed India ETFs: Higher expense ratios but no PFIC complications. You pay straightforward US capital gains tax.
Direct equity through GIFT City: If you trade individual stocks rather than pooled funds, you avoid PFIC classification. You own the stocks directly.
GIFT City USD fixed deposits: These are bank deposits, not pooled investment funds. They don't trigger PFIC rules. You still get the USD denomination benefit.
Portfolio Management Services (PMS): In a PMS structure, you own individual securities, not fund units. This may avoid PFIC classification while still accessing professional management.
The bottom line: GIFT City isn't closed to US NRIs. But the products that make sense are different from what works for UAE or UK NRIs.
Situation 2: You Need This Money Within 2-3 Years
GIFT City products work best for patient capital. If you might need your money soon, other options serve you better.
Here's why.
AIFs have mandatory lock-ins. Alternative Investment Funds, which represent the bulk of GIFT City's fund ecosystem, typically lock your money for 3 years minimum.
Some infrastructure and real estate focused AIFs lock you in for 5 years or longer. If you need emergency access to that cash, you simply can't get it.
The minimum AIF investment is USD 75,000 (Source: IFSCA). That's a significant amount to lock away if your job situation is uncertain, you're planning a major purchase, or you might relocate.
Equity funds carry sequence risk. Even GIFT City mutual funds without hard lock-ins can be problematic for short time horizons. Markets fluctuate. If you need to redeem during a downturn, you crystallize losses.
We saw this play out in our community. A member invested USD 50,000 in late 2021. By mid-2022, his portfolio was down 18%.
He needed funds for a property down payment. He sold at a loss because his timeline didn't match his product choice.
Transfer costs eat into short-term returns. Moving money from UAE to GIFT City involves SWIFT charges (AED 75-150), intermediary bank deductions (USD 10-30), and exchange rate markups (1-3%).
On a 1-year investment, these costs might consume 2-3% of your returns before you've earned anything.
👉 Tip: GIFT City USD FDs with shorter tenures (3-6 months) can work for medium-term needs. But for money you might need within 12 months, a UAE savings account or local fixed deposit probably makes more sense despite lower returns.
When short-term GIFT City might work:
If you have specific USD obligations coming up (school fees, planned property purchase in dollars), parking money in a GIFT City USD FD maintains currency matching while earning interest. But this is parking, not investing.
Situation 3: Deposit Insurance Is Non-Negotiable for You
Some investors simply need to know their money is protected by a government guarantee. That's a valid priority. GIFT City doesn't offer it.
Traditional NRE and NRO fixed deposits are covered by DICGC (Deposit Insurance and Credit Guarantee Corporation) up to ₹5 lakh per depositor per bank. If your bank fails, this government-backed insurance protects your principal and accrued interest automatically (Source: DICGC).
GIFT City operates under IFSCA regulations, not RBI. According to ICICI Bank's GIFT City FAQ, deposits at their IFSC Banking Unit are explicitly "not covered by Deposit Insurance."
Does this mean GIFT City banks are risky? Not necessarily. The banks operating in GIFT City are the same trusted names: SBI, HDFC, ICICI, Axis, Kotak.
Your deposit is backed by the parent bank's entire balance sheet, not just the IBU's capital. IFSCA requires these units to maintain capital adequacy ratios under strict prudential guidelines.
But "implicit protection from strong banks" is not the same as "explicit government guarantee."
If you lost sleep after hearing about bank failures anywhere in the world, if you remember what happened during 2008 or any banking crisis, if guaranteed protection matters more to you than higher returns, GIFT City may not be right for you.
👉 Tip: A middle path exists. Keep amounts up to ₹5 lakh in DICGC-insured NRE FDs across multiple banks. Put amounts above that threshold, where DICGC coverage doesn't apply anyway, into GIFT City for tax efficiency.
The math to consider:
DICGC covers ₹5 lakh per depositor per bank. If you have ₹50 lakh to invest:
Option A: Put ₹5 lakh each in 10 different banks' NRE FDs. Full insurance coverage, but managing 10 accounts is cumbersome.
Option B: Put ₹5 lakh in one insured NRE FD. Put the remaining ₹45 lakh in GIFT City where neither option has full insurance, but GIFT City offers tax benefits.
For amounts significantly above ₹5 lakh, the insurance argument weakens because you're uninsured either way above the limit.
Situation 4: You're Planning to Return to India Within 1-2 Years
GIFT City products are designed for non-residents. If you're about to become a resident, the calculus changes.
When you return to India and become a resident, you can continue holding GIFT City investments. But the tax treatment may shift depending on your residential status.
The RNOR transition:
After returning, most NRIs qualify for RNOR (Resident but Not Ordinarily Resident) status for 2-3 years. During this period, foreign income (including GIFT City returns) remains exempt from Indian tax. This provides a buffer.
But RNOR doesn't last forever. Once you become ROR (Resident and Ordinarily Resident), your global income becomes taxable in India.
GIFT City's tax benefits were designed for non-residents. The treatment for residents investing in IFSC products is different and potentially less favorable.
The practical complications:
If you invest in a 3-year AIF today and return to India in 18 months, you'll hold that AIF as a resident for 18 months. The tax treatment during that period requires careful analysis with a chartered accountant.
Your KYC status needs updating. Banks and fund houses will need to reflect your changed residential status. Some products might require you to exit.
Repatriation becomes irrelevant. If you're returning to India, the "easy repatriation" benefit of GIFT City adds no value. Your money is already coming home.
👉 Tip: If return to India is definite and imminent, consider investing in regular Indian mutual funds instead. Yes, there's TDS. But the long-term indexation benefits and simpler transition might serve you better.
When GIFT City still makes sense before returning:
If your return is 3-5 years away, GIFT City can build wealth tax-efficiently during your NRI years. Just plan your exit before or during the RNOR period when foreign income remains tax-free.
Situation 5: You Have Less Than USD 5,000 to Invest
GIFT City's economics don't work well for small amounts.
Yes, retail mutual funds now start at USD 500. Tata Asset Management launched the Tata India Dynamic Equity Fund at GIFT City with this minimum in September 2025 (Source: Business Standard). That's genuinely accessible.
But the fixed costs of GIFT City investing don't scale down.
Transfer costs are fixed, not percentage-based:
SWIFT charges: AED 75-150 per transfer. Exchange spread: 1-2% on small amounts (banks don't give you interbank rates on USD 500). Intermediary bank deductions: USD 10-30.
On a USD 500 investment, these costs might consume 5-8% before you've invested. You need months of returns just to break even on transfer costs.
Account maintenance complexity:
You'll need to maintain a relationship with a GIFT City bank or platform. Track separate statements. Manage KYC renewals. For USD 500, this administrative overhead may not be worth it.
Alternative minimums to consider:
NRE fixed deposits start from ₹10,000 at most banks. Regular Indian mutual funds accept ₹500 SIPs. You can build a portfolio gradually without the fixed-cost burden.
👉 Tip: A practical threshold is USD 5,000-10,000 before GIFT City makes economic sense. Below that, transfer costs as a percentage are too high. Use regular NRE accounts and Indian mutual funds to build your corpus first.
The one exception:
If you're already maintaining a GIFT City account for larger investments, adding small amounts periodically makes sense. The account infrastructure already exists. But opening a GIFT City account solely for USD 500? The math doesn't work.
Situation 6: You Already Have Better Tax-Advantaged Options at Home
GIFT City's primary appeal is tax efficiency. But depending on where you live, you might already have excellent tax-advantaged options.
UK NRIs and ISAs:
UK residents get a £20,000 annual ISA (Individual Savings Account) allowance. Returns within an ISA are completely tax-free, forever. No reporting, no complications, no limits on eventual withdrawal.
From December 2025, the FSCS (Financial Services Compensation Scheme) protects ISA deposits up to £120,000 per person.
GIFT City FDs offer maybe 5-6% in USD. UK Cash ISAs offer 4-4.5% in GBP with full government insurance and zero tax. The math often favors maxing out ISAs first before considering GIFT City.
US NRIs and retirement accounts:
401(k)s offer employer matching (free money). Traditional IRAs provide tax-deferred growth. Roth IRAs provide tax-free growth. These accounts have contribution limits, but within those limits, they're hard to beat.
A US NRI putting money into GIFT City instead of a 401(k) with employer match is leaving money on the table.
Singapore NRIs:
Singapore has no capital gains tax. GIFT City's "tax-free in India" benefit adds nothing because Singapore already doesn't tax your investment gains. The only question is whether India-focused funds available in Singapore or through GIFT City offer better risk-adjusted returns.
👉 Tip: Layer your investments. First, max out any tax-advantaged accounts in your residence country. Then consider GIFT City for amounts beyond those limits.
When GIFT City beats home-country options:
UAE NRIs have no ISA equivalent, no retirement tax breaks, no capital gains tax shelter to max out. For them, GIFT City's tax efficiency is unique and valuable. The same applies to NRIs in other Gulf countries.
For UAE-based NRIs, GIFT City often makes sense from the first dollar. For UK or US NRIs, it's often a "after maxing out local options" consideration.
The Decision Framework
Let's synthesize when GIFT City works and when it doesn't.
GIFT City is likely NOT right for you if:
You're a US-based NRI and haven't consulted a PFIC specialist. You need the money within 2 years and can't afford to lock it up. Deposit insurance is psychologically essential for your peace of mind.
You're returning to India within 12-18 months. You have less than USD 5,000 to invest. Your residence country offers tax-advantaged accounts you haven't fully utilized.
GIFT City is likely a strong fit if:
You're UAE or GCC-based with no capital gains tax at home. You have a 5+ year investment horizon. You're comfortable with regulatory evolution in a young ecosystem.
You have USD 10,000+ to invest, making transfer costs proportionally small. You want USD denomination to avoid rupee depreciation risk.
Questions to ask yourself:
What's my realistic investment timeline?
What are my home country's tax rules on foreign investments?
Have I maxed out local tax-advantaged options first?
Can I afford to have this money locked for 3 years (for AIFs)?
Does deposit insurance matter enough to me to accept lower returns?
What If You're on the Fence?
If none of the six situations clearly applies but you're still uncertain, consider a test allocation.
Start with a GIFT City USD fixed deposit. It's the simplest GIFT City product. Minimum amounts are low. Tenures can be short.
Returns are guaranteed in USD. You'll experience the account opening process, the transfer mechanics, and the platform without taking market risk.
If that goes smoothly and the experience gives you confidence, scale up. Move into mutual funds or eventually AIFs as your comfort and corpus grow.
Compare options with our FD comparison tool to see GIFT City rates alongside NRE and FCNR alternatives. Track Indian market movements with our GIFT Nifty tracker.
And if you want to hear from NRIs who've made both choices, investing through GIFT City and choosing alternatives, join our WhatsApp community. Real experiences from real investors cut through the marketing noise.
When you're ready to take the next step, download the Belong app. We'll help you navigate whether GIFT City fits your situation and, if it does, which products match your goals.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Tax rules vary by residence country and are subject to change. PFIC rules are complex and require professional guidance for US persons. Consult a qualified financial advisor and tax professional in your country of residence before making investment decisions. The situations described are general guidance, not personalized advice.
