How GIFT City Tax Treatments Work for UK NRIs

"My accountant in London says GIFT City interest is tax-free. My CA in India says the same. So where exactly do I pay tax?"

This question landed in our WhatsApp community three times last week alone. And it's the right question to ask - because the answer isn't straightforward.

Here's the short version: GIFT City investments are largely tax-free in India. But for UK tax residents, your worldwide income is now taxable in the UK (post-April 2025 non-dom changes). 

The India-UK Double Taxation Agreement (DTAA) ensures you don't pay twice - but you need to understand exactly how.

At Belong, we've helped hundreds of UK-based NRIs structure their GIFT City investments. This guide breaks down the complete picture - India-side taxes, UK-side taxes, DTAA mechanics, and what you actually need to file.

The Two-Country Tax Reality for UK NRIs

Every UK NRI investing in India faces taxation in two jurisdictions:

India (Source Country): Where your investment sits and generates income. Tax rules depend on your NRI status and the specific product.

UK (Residence Country): Where you live and are tax resident. Tax rules changed dramatically in April 2025.

The goal of any smart tax structure: Pay the minimum legal tax across both countries, using DTAA provisions to avoid paying twice.

GIFT City achieves something remarkable here. It minimises (often eliminates) India-side tax, while DTAA credits reduce your UK liability. The net result can be significantly better than traditional Indian investments or even UK-based alternatives.

👉 Tip: Use our Residential Status Calculator to confirm your NRI status in India. Your tax treatment depends on getting this right.

What Changed in April 2025 for UK NRIs?

Before diving into GIFT City specifics, you need to understand the seismic shift in UK tax law.

The Old Rules (Pre-April 2025)

Non-domiciled UK residents could use the "remittance basis." This meant:

• Foreign income was only taxed if you brought it into the UK
• You could keep GIFT City interest offshore, tax-free in both countries
• After 7 years, you paid £30,000 annually to maintain this benefit
• After 15 years, you became "deemed domiciled" and lost the benefit entirely

The New Rules (Post-April 2025)

The remittance basis was abolished on 6 April 2025. Now:

• All UK residents are taxed on worldwide income as it arises
• Domicile status no longer matters for income tax purposes
• A new 4-year Foreign Income and Gains (FIG) regime exists for recent arrivals

The New FIG Regime - Who Qualifies?

If you've returned to the UK after 10+ years of non-residence, you may qualify for the FIG regime:

Key point for most UK NRIs: If you've been UK resident for more than 4 years (after a 10-year absence) - or never had a 10-year absence - the FIG regime doesn't apply. You're taxed on worldwide income on the "arising basis."

This means your GIFT City income is taxable in the UK, even if you never bring it into the UK.

GIFT City Tax Treatment in India: The Good News

Here's where GIFT City shines. The International Financial Services Centre (IFSC) at GIFT City enjoys special tax treatment under Indian law.

What's Completely Tax-Free in India?

What's Taxed at Reduced Rates?

What's Exempt from Transaction Taxes?

GIFT City transactions are exempt from:

• Securities Transaction Tax (STT)
• Commodity Transaction Tax (CTT)
• Stamp duty
• GST on financial services

Example: Trading ₹10 lakh worth of equities on BSE Mumbai costs approximately ₹1,000 in STT alone. The same trade on NSE IFSC at GIFT City? Zero.

👉 Tip: Compare rates using our NRI FD Comparison Tool - you'll see GIFT City FDs consistently offer tax-free returns versus TDS-deducted NRO alternatives.

UK Tax on GIFT City Income: The Complete Picture

Now the crucial question: How does the UK tax your GIFT City income?

Interest Income (From GIFT City FDs)

India: Tax-free. No TDS. No filing requirement for this income alone.

UK: Taxable as savings income at your marginal rate:

• Basic rate (20%): Income £12,571-£50,270
• Higher rate (40%): Income £50,271-£125,140
• Additional rate (45%): Income above £125,140

The Savings Allowance: UK residents get a tax-free allowance on interest:

• Basic rate taxpayers: £1,000
• Higher rate taxpayers: £500
• Additional rate taxpayers: £0

Dividend Income (From GIFT City Funds/AIFs)

India: 10% withholding tax (lower than the 20% mainland rate).

UK: Taxable as dividend income:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

Dividend Allowance: First £500 of dividend income is tax-free.

Capital Gains (From GIFT City Securities)

India: Varies by product:

• Listed securities on IFSC exchanges: Often 0% for NRIs in specified funds
• AIFs: Fund-level taxation (you don't file separately)
• Direct equity: 9% on IFSC-listed, versus 12.5% LTCG on mainland

UK: Taxable as capital gains:

• Basic rate: 18% (24% for residential property)
• Higher/Additional rate: 24% (24% for residential property)

Annual Exempt Amount: First £3,000 of gains is tax-free in 2025/26.

How the India-UK DTAA Prevents Double Taxation

Here's where it gets interesting. The India-UK Double Taxation Avoidance Agreement prevents you from paying full tax in both countries.

The Credit Method

For most UK NRIs with GIFT City investments, the "credit method" applies:

1. Income is taxable in both countries (per each country's rules)
2. India taxes first (as source country)
3. UK gives credit for Indian tax paid
4. You pay the higher of the two rates (not both combined)

The GIFT City Twist: Tax Sparing Credit

This is where GIFT City becomes exceptional for UK NRIs.

The India-UK DTAA contains a "tax sparing" provision (Article 24). It says: Even if India doesn't actually tax your income, the UK should give credit as if India had taxed it at the treaty rate.

For interest income, the treaty rate is 15%.

What this means practically:

Without tax sparing, you'd pay 0% in India but full 40% in UK. With tax sparing, you get a 15% credit against your UK liability.

Important caveat: Tax sparing provisions are complex and not all HMRC officers interpret them identically. We strongly recommend consulting a UK tax specialist familiar with the India-UK DTAA.

👉 Tip: Read our complete guide on how NRIs can avoid double taxation for step-by-step DTAA claim instructions.

Worked Example: GIFT City FD for a UK Higher-Rate Taxpayer

Let's make this concrete with numbers.

Profile: Priya is a UK tax resident earning £80,000 annually. She invests £50,000 ($63,500) in a GIFT City USD FD at 5% annual interest.

Annual Interest Earned: $3,175 (approximately £2,500 at current rates)

Without GIFT City (Traditional NRO FD)

With GIFT City USD FD

Net benefit of GIFT City: 15% lower effective tax rate, plus no TDS hassle, plus currency protection.

Note: This is illustrative. Actual tax depends on your complete income profile, applicable allowances, and HMRC's application of treaty provisions.

Tax Treatment by GIFT City Product

Different products have different tax treatments. Here's the breakdown:

Foreign Currency Fixed Deposits

Best for: Conservative investors wanting guaranteed returns with simplified India compliance.

Alternative Investment Funds (AIFs)

Best for: Sophisticated investors seeking higher returns with 3-year lock-in tolerance.

GIFT City Mutual Funds

UK-specific warning: The fund's reporting fund status affects whether gains are taxed as income (higher rates) or capital gains (lower rates). Most GIFT City funds are new and may not yet have reporting fund status. Check before investing.

Global Equities via NSE IFSC

Best for: Active traders wanting global equity exposure without STT drag.

👉 Tip: For detailed product comparisons, explore our GIFT City investments guide.

Required Documents for UK NRI Tax Compliance

For India (To Claim NRI Benefits)

For UK (To Report Foreign Income)

TRC Application Process (UK)

1. Complete Form RES1 online or by post
2. Submit to HMRC with supporting documents
3. Processing takes 2-3 weeks typically
4. TRC is valid for the tax year specified
5. Submit to Indian bank/institution before income payment

Common Tax Mistakes UK NRIs Make

Mistake 1: Assuming "Tax-Free in India" Means "Tax-Free Everywhere"

GIFT City interest is tax-free in India. But as a UK tax resident, you're taxed on worldwide income. The India exemption doesn't eliminate UK tax - it just means you have no Indian tax to credit.

Solution: Factor in UK tax when calculating true returns. A 5% GIFT City FD at 25% effective UK tax gives you 3.75% net - still better than most UK savings accounts post-tax.

Mistake 2: Not Claiming Tax Sparing Credit

Many UK NRIs (and their accountants) don't know about the tax sparing provision in the India-UK DTAA. They pay full UK tax on GIFT City income without claiming the 15% deemed credit.

Solution: Specifically discuss Article 24(5) of the India-UK DTAA with your UK tax advisor. Provide them with the treaty text if needed.

Mistake 3: Missing Reporting Deadlines

GIFT City income must be reported on UK Self Assessment by 31 January following the tax year. Late filing triggers automatic £100 penalties, escalating with time.

Solution: Register for Self Assessment by 5 October if you have foreign income. File by 31 January. Set calendar reminders.

Mistake 4: Treating Offshore Funds as Reporting Funds

If a GIFT City mutual fund isn't on HMRC's list of reporting funds, gains are taxed as income (up to 45%) rather than capital gains (up to 24%). This can nearly double your tax.

Solution: Verify reporting fund status before investing. Consider FDs or AIFs if uncertain about fund status.

Mistake 5: Ignoring Currency Gains

If GBP weakens against USD during your investment, the currency gain is taxable separately from investment returns in some scenarios.

Solution: Keep detailed records of exchange rates at investment and withdrawal. Discuss currency gain treatment with your tax advisor.

👉 Tip: Read our NRI tax filing mistakes guide to avoid these and other common errors.

The FIG Regime: Special Rules for Recent UK Arrivals

If you've recently moved to the UK after 10+ years abroad, the Foreign Income and Gains regime offers significant advantages:

How FIG Works

What You Lose When Claiming FIG

Making a FIG claim means sacrificing:

• Personal allowance (£12,570 in 2025/26)
• Capital gains annual exempt amount (£3,000)
• Marriage allowance/blind person's allowance

When FIG makes sense: If your GIFT City income exceeds the value of lost allowances. For someone with £50,000+ foreign income, FIG relief is almost always beneficial.

When FIG doesn't make sense: If your foreign income is small (under £10,000-15,000), keep your allowances and pay tax on the foreign income.

GIFT City vs Traditional Indian Investments: Tax Comparison

Here's a side-by-side comparison for a UK NRI:

The GIFT City advantage: Higher rates than FCNR, more flexibility, tax-free in India, and tax sparing credit in UK. It's the optimal structure for most UK NRIs seeking safe, tax-efficient returns.

How to Report GIFT City Income on UK Tax Return

Step-by-Step SA106 Filing

Step 1: Log into HMRC online services

Step 2: Start Self Assessment tax return (SA100)

Step 3: Add SA106 supplementary pages for foreign income

Step 4: Enter your GIFT City income:

• Interest: Box 1-3 (Foreign savings interest)
• Dividends: Box 4-6 (Foreign dividends)
• Capital gains: Separate capital gains pages

Step 5: Claim Foreign Tax Credit Relief:

• Box 2: Foreign tax paid (enter deemed 15% for tax sparing)
• Supporting calculation in additional information

Step 6: Submit by 31 January deadline

Record-Keeping Requirements

HMRC requires you to keep records for at least 5 years after the submission deadline:

Your Next Step

Understanding GIFT City tax treatment puts you ahead of most UK NRIs who lose money to unnecessary tax or miss available credits.

Here's what to do now:

1. Check your status: Use our Residential Status Calculator to confirm NRI status
2. Compare options: Explore GIFT City FD rates versus traditional alternatives
3. Get your TRC: Apply to HMRC if you don't already have one for the current tax year
4. Consult specialists: Engage a UK tax advisor familiar with India-UK DTAA before making large investments

Have questions about your specific situation? Join our WhatsApp community where UK NRIs discuss tax strategies daily. Or download the Belong app to explore GIFT City investment options.

Sources:

• GOV.UK – 4-Year Foreign Income and Gains Regime
• LITRG – Foreign Income and Gains from April 2025
• Deloitte – FIG Regime Overview
• ClearTax – India-UK DTAA
• Income Tax India – DTAA Portal
• Investmates – GIFT City Tax Benefits
• Arthgyaan – UK Non-Dom Tax Changes
• Zerodha – GIFT City Benefits for NRIs