Do GIFT City Mutual Funds Really Offer Tax-Free Returns? The Reality

"Tax-free returns on GIFT City mutual funds!"

You've seen this claim everywhere. On websites. In WhatsApp forwards. From investment advisors pitching their services.

And you're skeptical. Rightly so.

After 12 years of helping NRIs navigate Indian investments, I've learned that "tax-free" rarely means what people think it means. At Belong, our WhatsApp community is full of NRIs who came in confused about what they'd actually pay on GIFT City investments.

So let me give you the honest answer, no marketing spin.

Yes, GIFT City mutual funds can be tax-free. But only if you meet specific conditions, invest through the right structure, and live in the right country.

This article breaks down exactly when the tax-free claim holds up, when it doesn't, and what you'll actually pay in different scenarios.

The Short Answer: It Depends on Three Things

Whether your GIFT City mutual fund returns are truly tax-free depends on:

1. The fund structure you choose Retail mutual funds, AIFs, and PMS have completely different tax treatments.

2. Your country of residence UAE NRIs and US NRIs face vastly different tax realities.

3. What "tax-free" actually means to you Tax-free in India? Or tax-free globally?

Let's unpack each of these.

What Does "Tax-Free" Actually Mean?

Here's where the confusion starts.

When someone says GIFT City mutual funds are "tax-free," they usually mean one of two things:

Meaning 1: No tax in India This is often true. Under Section 10(4D) of the Income Tax Act, income from specified funds in GIFT IFSC is exempt from Indian income tax for non-residents (Source: Income Tax Act).

Meaning 2: No tax anywhere This is only true if you live in a zero-tax jurisdiction like UAE.

The marketing usually focuses on Meaning 1 but implies Meaning 2. That's where NRIs get burned.

A member from our community in London discovered this the hard way. He assumed "tax-free in India" meant he owed nothing. Then his UK accountant pointed out that all foreign income must be reported on his Self Assessment tax return (Source: GOV.UK). He ended up paying UK tax on gains he thought were "tax-free."

👉 Tip: Always ask: "Tax-free where?" India exempting your gains doesn't mean your home country will.

When GIFT City Mutual Funds ARE Tax-Free (in India)

Let's look at when the tax-free claim is accurate for Indian taxation.

Scenario 1: IFSCA-Registered Retail Mutual Funds

Funds like Tata India Dynamic Equity Fund or DSP Global Equity Fund are registered with IFSCA under the Fund Management Regulations 2022 (amended 2025).

For these funds:

Capital gains on redemption are exempt under Section 10(4D). No TDS is deducted. No Indian ITR filing is required (if this is your only Indian income).

The exemption applies regardless of holding period. Short-term or long-term, the Indian tax treatment is the same: exempt.

Scenario 2: Category I and II AIFs

Alternative Investment Funds in Categories I and II have taxation handled entirely at the fund level. When you redeem, there's no additional tax on your end.

You don't even need a PAN card or to file Indian tax returns if you invest exclusively through these AIFs and they've already deducted applicable taxes (Source: IFSCA Fund Management Regulations).

Scenario 3: Category III AIFs Investing in Indian Mutual Funds

Here's a specific structure that's genuinely tax-optimized. Category III AIFs that invest in Indian equity mutual funds (not directly in stocks) are fully exempt from capital gains tax in India (Source: Belong Tax Guide).

The fund pays taxes on its investment activities. You, as the NRI investor, receive distributions that are exempt from further taxation.

Scenario 4: Derivative Income

Under Section 10(4E), income from non-deliverable forward contracts, offshore derivative instruments, and OTC derivatives is 100% exempt from Indian income tax. The Finance Bill 2025 expanded this to include transactions with Foreign Portfolio Investors in GIFT City (Source: Finance Bill 2025).

When GIFT City Mutual Funds Are NOT Tax-Free

Now for the reality check. Here's when the tax-free claim falls apart.

Exception 1: Portfolio Management Services (PMS)

If you invest through PMS in GIFT City, capital gains are calculated in your individual name. You need a PAN card. You need to file ITR. And you pay tax.

The rates after Budget 2024:

This isn't tax-free by any measure.

Exception 2: Direct Equity Trading on IFSC Exchanges

If you trade stocks directly on NSE IFSC or BSE IFSC, your capital gains are taxed at 9%. Lower than mainland India's 20-30% rates, yes. But not zero (Source: InvestMates).

Exception 3: Outbound Funds

GIFT City mutual funds fall into two categories: inbound (investing in Indian equities) and outbound (investing in global equities).

Inbound funds investing in Indian equities are generally exempt from paying any taxes.

Outbound funds investing in global equities are taxable. But here's the nuance: there's no investor-level tax or TDS deducted when you redeem (Source: Belong). The taxation happens at the fund level.

Exception 4: Bonds Listed After July 2023

Rupee-denominated bonds listed on IFSC exchanges have different rates based on listing date:

Listed before July 1, 2023: 4% withholding tax. Listed after July 1, 2023: 9% withholding tax.

Not exactly "tax-free."

👉 Tip: Before investing, ask specifically: "What is the tax treatment for this exact product?" Generic answers about GIFT City being tax-free aren't helpful.

The Country-of-Residence Reality Check

This is where most NRIs get blindsided.

UAE, Bahrain, Qatar, Kuwait, Oman

You're in the sweet spot.

These countries have zero personal income tax. GIFT City exempts gains in India. Combined effect: 0% total tax on your returns.

You keep 100% of what you earn. This is why UAE-based NRIs benefit most from GIFT City investments.

United Kingdom

The picture is more complicated.

Yes, your GIFT City gains are tax-free in India. But as a UK tax resident, you must report all foreign income on your Self Assessment tax return. The previous £2,000 exemption for small foreign income no longer applies from 6 April 2025 (Source: GOV.UK).

Since GIFT City has zero TDS, you'll likely owe UK tax on the full amount at your marginal rate. If you're a higher-rate taxpayer at 40%, that's what you'll pay.

The India-UK DTAA lets you claim Foreign Tax Credit Relief. But with zero Indian tax paid, there's nothing to credit. You pay full UK tax.

Non-domiciled UK residents ("Non-Doms") may have different treatment if gains aren't remitted to the UK. Consult a UK tax advisor.

United States

Here's where GIFT City's tax benefits largely evaporate.

Most GIFT City mutual funds are likely classified as PFICs (Passive Foreign Investment Companies) under US tax law. This triggers:

Annual Form 8621 filings. Taxation on notional unrealized gains (even if you haven't sold). Punitive tax rates under the "Excess Distribution Method."

One US-based NRI in our community calculated that PFIC treatment would cost him more in taxes and compliance than simply investing in US-based India ETFs (Source: Arthgyaan).

Some AIFs structured as partnerships might avoid PFIC classification. But this requires careful structuring and expert advice.

Bottom line: US-based NRIs should consult a cross-border tax specialist before touching GIFT City mutual funds.

Germany, France, Australia

Most European and developed countries tax worldwide income. GIFT City's Indian tax exemption doesn't help. You'll pay your home country's capital gains tax on the full amount.

DTAA treaties may provide some relief, but the relief is limited when there's zero Indian tax to credit against.

👉 Tip: Use our Residential Status Calculator to confirm your tax status. Then research your resident country's treatment of foreign investment income.

The Fine Print Marketing Doesn't Mention

Let me share some realities that promotional content conveniently skips.

1. "Tax-free" doesn't mean "reporting-free"

Even if your gains are exempt in India, many countries require you to declare them. In the UK, you file SA106. In the US, FBAR applies if foreign accounts exceed $10,000. Failing to report exempt income can trigger penalties.

2. Status changes can change tax treatment

GIFT City's tax advantages are designed for NRIs. If you return to India and become a Resident, the tax treatment may change. You can continue holding GIFT City funds, but consult a tax advisor about implications (Source: PrimeInvestor).

3. No deposit insurance

Unlike NRE/NRO fixed deposits covered by DICGC up to ₹5 lakh, GIFT City FDs are not covered under India's deposit insurance scheme. GIFT City operates under IFSCA, not RBI. The Axis Bank GIFT City FAQ states this clearly.

This isn't about tax, but it's a risk factor that gets glossed over in "GIFT City is amazing" articles.

4. Minimum investments can be high

While retail mutual funds now accept $500 (like Tata's September 2025 launch), AIFs require $75,000 minimum (reduced from $150,000 in February 2025). If tax-free treatment requires specific structures, those structures may have entry barriers.

5. Not all GIFT City funds qualify for Section 10(4D)

The exemption applies to "specified funds" under IFSCA regulations. Not every fund operating in GIFT City automatically qualifies. Verify the fund's regulatory status before assuming tax-free treatment.

Myth vs Reality: A Quick Reference

How to Actually Get Tax-Free Returns

If you're serious about minimizing taxes, here's the playbook:

Step 1: Confirm your residency

Your tax obligations depend on where you're tax resident, not where you hold citizenship. An Indian citizen living in UAE is taxed as a UAE resident (i.e., zero tax). Use the Compliance Compass to check your obligations.

Step 2: Choose the right structure

For genuine tax efficiency:

IFSCA-registered retail mutual funds: Tax-free in India, minimal complexity. Category I/II AIFs: Fund-level taxation, no individual filing required. Category III AIFs investing in mutual funds: Full exemption at both fund and investor level.

Avoid PMS if tax minimization is your priority.

Step 3: Verify the fund's regulatory status

Ask the fund house: "Is this fund registered under IFSCA Fund Management Regulations 2022? Does Section 10(4D) apply to investor redemptions?"

Don't assume. Verify.

Step 4: Understand your home country's rules

Before investing a single dollar, know:

Do you need to report foreign income even if exempt? Do PFIC or similar rules apply? Is there a foreign tax credit mechanism? What documentation will you need at tax time?

Step 5: Keep records

Even if no ITR is required in India, keep records of all transactions. Tax authorities in both India and your resident country can request documentation years later.

👉 Tip: The effort to ensure true tax-free status is worth it. A UAE NRI investing $100,000 over 10 years could save $30,000+ in taxes compared to using regular Indian mutual funds or taxable home-country investments.

Comparing Real Tax Outcomes

Let's put numbers to these scenarios.

Investment: $50,000 Holding period: 5 years Return: 12% annual (total gain: ~$38,000)

The same investment, same return, wildly different tax outcomes.

What About DTAA Benefits?

India has Double Taxation Avoidance Agreements with 90+ countries. But here's the thing about DTAA and GIFT City:

When there's no Indian tax, DTAA has limited relevance.

DTAA prevents you from paying tax twice on the same income. If GIFT City exempts your gains in India, there's no Indian tax to credit against your home country obligation.

DTAA becomes useful when:

You invest through taxable routes (PMS, direct equity trading). Your home country taxes your gains and you want to claim Indian tax paid. You're claiming lower TDS rates under treaty provisions.

For most NRIs using tax-exempt GIFT City structures, DTAA is a backup rather than a primary benefit.

That said, always get a Tax Residency Certificate (TRC) from your resident country. If your tax situation changes or if you need to claim DTAA benefits later, having the TRC ready saves significant hassle. Learn more in our DTAA guide.

The Verdict: Tax-Free Is Real, But Conditional

After all this analysis, here's the honest conclusion:

GIFT City mutual funds can genuinely be tax-free for the right investor, using the right structure, living in the right country.

For a UAE-based NRI investing through IFSCA-registered retail mutual funds or Category I/II AIFs, the "tax-free" claim is accurate. Zero Indian tax. Zero UAE tax. 100% of returns in your pocket.

For everyone else, "tax-advantaged" is more accurate than "tax-free."

UK NRIs get Indian tax exemption but pay UK tax. US NRIs face PFIC complications that often make GIFT City less attractive than simpler alternatives. German, French, Australian NRIs will pay their home country rates.

The marketing isn't lying. It's just incomplete.

Making the Right Decision

GIFT City mutual funds represent a genuine evolution in how NRIs can invest in India. The tax benefits are real for qualifying investors. The currency protection is valuable. The simplified repatriation is a major improvement over traditional routes.

But "tax-free" isn't a magic label that applies universally.

Before investing, answer these questions:

What is my exact tax residency status? Which fund structure am I using? What are my home country's rules for foreign investment income? Have I verified this specific fund qualifies for Section 10(4D)?

Get those answers right, and GIFT City can deliver on its promise.

Want to discuss your specific situation? Join Belong's WhatsApp community where many NRIs share their experiences with GIFT City taxation. Or download the Belong app to explore tax-efficient GIFT City FDs, mutual funds, and more with guidance from our team.

Sources:

• Income Tax Act Sections 10(4D), 10(4E)
• IFSCA Fund Management Regulations 2022 (Amended 2025)
• GOV.UK - Foreign Income Reporting
• Arthgyaan - PFIC Rules for US NRIs
• InvestMates - GIFT City Tax Benefits
• PrimeInvestor - GIFT City Investment Guide