Capital Gains on GIFT City Mutual Funds - How Much Tax Do NRIs Pay

​A client from Dubai asked us last month: "I've heard GIFT City funds are tax-free. Is that actually true, or is there a catch?"

It's the question we get most often at Belong. And the honest answer is: it depends on how you invest.

GIFT City mutual funds can be completely tax-free in India for NRIs. But not all of them. Some are taxed at 9-15%. Others follow different rules entirely. The tax treatment depends on the fund structure, your residential status, and your country of residence.

We've spent months helping NRIs in our WhatsApp community understand these rules. This guide puts everything in one place. By the end, you'll know exactly how much tax you'll pay on your GIFT City investments and how to minimize it legally.

The Big Picture: How GIFT City Taxation Differs from Regular Mutual Funds

Before we get into the specifics, understand one fundamental difference.

Regular Indian mutual funds are regulated by SEBI and taxed under standard Income Tax Act provisions. When you redeem them as an NRI, TDS gets deducted at 20% for short-term equity gains and 12.5% for long-term gains (Source: Economic Times).

GIFT City mutual funds operate differently. They're regulated by IFSCA (International Financial Services Centres Authority) and treated as "offshore" investments under FEMA. The tax rules under Section 10(4D) and Section 10(4E) of the Income Tax Act create exemptions that don't exist for regular funds.

Here's the comparison at a glance:

👉 Tip: The tax savings from GIFT City can add 2-3% annually to your effective returns compared to regular mutual funds.

What Capital Gains Tax Actually Applies?

Let's break down each scenario.

Scenario 1: GIFT City Retail Mutual Funds

Funds like the Tata India Dynamic Equity Fund (minimum $500) are structured as IFSCA-registered retail schemes. For NRIs investing in these funds:

Capital gains are generally tax-free in India under Section 10(4D) of the Income Tax Act. This section exempts income arising to a non-resident from transfer of units of specified funds launched under IFSCA regulations (Source: Income Tax Act).

You pay taxes only in your country of residence. For UAE-based NRIs where there's no capital gains tax, this means completely tax-free returns.

Scenario 2: Category III AIFs

Alternative Investment Funds (Category III) 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 is taxed at the fund level, and distributions to NRI investors are exempt.

Minimum investment: USD 75,000 (reduced from USD 150,000 in February 2025).

Scenario 3: Direct Equity Trading on IFSC Exchanges

If you trade stocks directly on NSE IFSC or BSE IFSC, capital gains on IFSC-listed shares are taxed at 9%. This is considerably lower than the 20-30% rates elsewhere in India (Source: InvestMates).

Scenario 4: Derivatives and OTC Contracts

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

Zero TDS: The Game-Changer for NRIs

This is where GIFT City funds truly shine.

With regular Indian mutual funds, NRIs face immediate TDS deduction on redemption:

For GIFT City mutual funds, there's no TDS. Zero. The entire redemption amount hits your account without any deduction (Source: GoINRI).

Why does this matter? Two reasons:

Cash flow: With regular funds, if you redeem ₹10 lakh with ₹2 lakh gains, TDS of ₹24,000-60,000 gets deducted immediately. You claim it back when filing ITR, but that's months of lost liquidity.

Refund hassle: Many NRIs don't file Indian ITR because their only income is investment gains with TDS already deducted. But without filing, you can't claim refunds or carry forward losses.

GIFT City eliminates both problems.

👉 Tip: For NRIs who want simplicity and immediate access to full redemption proceeds, GIFT City funds are significantly easier to manage.

Section 10(4D): The Key Tax Exemption

Let's decode this section since it's the foundation of GIFT City tax benefits.

Section 10(4D) of the Income Tax Act exempts income arising to a non-resident from:

Transfer of units of investment funds set up in an IFSC, or transfer of securities by such funds.

This covers:

Mutual funds registered with IFSCA under Fund Management Regulations 2022 (amended 2025), Alternative Investment Funds (Category I, II, III) in GIFT IFSC, REITs and InvITs listed on IFSC exchanges, and specified trusts operating under IFSCA oversight.

The exemption applies regardless of holding period. Whether you hold for 1 month or 5 years, gains qualify for exemption if the fund meets criteria under this section.

However, there are conditions:

The fund must be set up in GIFT IFSC (not just invest there). You must be a non-resident at the time of transfer. The fund must be registered under IFSCA Fund Management Regulations.

For most GIFT City mutual funds launched by major AMCs, these conditions are met by default.

What About Dividends?

If you opt for dividend (IDCW) plans in GIFT City funds, the taxation is different from capital gains.

For regular Indian mutual funds, dividends are added to your income and taxed at slab rates. TDS at 20% applies for NRIs (Source: Bajaj Finserv).

For GIFT City funds:

Dividend income from IFSC units is taxed at just 10%, compared to 20% for non-IFSC companies (Source: InvestMates). This concessional rate is specified under IFSC regulations.

Still, growth plans are generally more tax-efficient since:

No dividend tax applies during the accumulation phase. You control when to trigger gains (timing flexibility). For UAE NRIs, redemption gains are tax-free anyway.

👉 Tip: Unless you need regular income, choose growth option in GIFT City funds. It maximizes compounding and gives you tax control.

Tax Treatment by Investment Route

Different ways of investing in GIFT City have different tax implications:

FPI (Foreign Portfolio Investment) Route

Capital gains: 15% effective rate. Dividends: 7.5%. No PAN card required.

This route works through pooled investment vehicles where your individual participation is capped at 25%, with maximum 50% aggregate NRI investment per scheme.

AIF Route

Category I & II AIFs: Tax pass-through structure. All taxation happens at fund level. You don't pay any additional tax on redemption. You're also exempt from filing Indian tax returns if your only income is from these AIFs and tax has already been deducted.

Category III AIFs: Taxed at fund level at 10-15%. Distributions to NRIs are exempt. If the AIF invests in Indian mutual funds (rather than directly in stocks), it's fully exempt from capital gains tax at both fund and investor level.

PMS Route

Portfolio Management Services have individual taxation. Capital gains are calculated in your name.

STCG: 24% effective rate (20% + surcharge + cess). LTCG: 15% effective rate (12.5% + surcharge + cess). Dividends: 24% effective rate.

PMS requires a PAN card and you need to file ITR in India.

Direct GIFT City Fund Investment

This is the simplest route for most NRIs.

Capital gains: Often fully exempt under Section 10(4D). No TDS. No ITR filing required if your only income is from specified IFSC funds.

Country-Specific Tax Considerations

Your total tax bill depends on where you live, not just Indian tax rules.

UAE, Singapore, Hong Kong

These jurisdictions have zero capital gains tax. Combined with GIFT City exemptions in India, your effective tax rate is 0%. You keep 100% of your gains.

This is why UAE NRIs benefit most from GIFT City. The India-UAE DTAA plus GIFT City's domestic exemptions create complete tax efficiency.

USA

US-based NRIs face complexity. Most GIFT City mutual funds likely qualify as PFICs (Passive Foreign Investment Companies) under US tax law.

PFIC taxation is punitive. You may face tax on unrealized gains, higher rates on distributions, and complex reporting requirements. Consult a US tax advisor before investing in GIFT City funds.

The good news: Regular GIFT City bank FDs and some structured products may avoid PFIC classification.

UK

UK residents benefit from DTAA provisions. Capital gains paid in India (if any) can be claimed as foreign tax credit in the UK. For funds exempt in India, gains would be taxed under UK CGT rules.

Canada

Similar to the US, GIFT City mutual funds may be classified as foreign property requiring T1135 reporting. Capital gains would be taxed in Canada at your marginal rate, though foreign tax credits apply for any Indian tax paid.

👉 Tip: Your country of residence determines your final tax bill. Always consult a tax advisor who understands both Indian IFSC regulations and your home country's rules.

Transaction Taxes You Avoid

Capital gains tax is only part of the story. GIFT City also eliminates transaction taxes that eat into returns:

Securities Transaction Tax (STT): Zero

On mainland India, STT applies to every equity trade. For ₹10 lakh trading volume, you'd pay approximately ₹1,000 in STT. In GIFT City: Zero.

Commodities Transaction Tax (CTT): Zero

No CTT on derivative transactions.

Stamp Duty: Zero

No stamp duty on IFSC exchange transactions.

GST: Zero

Services provided to offshore individuals and entities are GST-exempt. Fund management fees, brokerage, and other services don't attract 18% GST.

Over a 10-year investment horizon, these savings compound significantly. The money you don't pay in taxes stays invested, generating returns.

Practical Example: Tax Savings Calculation

Let's compare a real scenario.

Investment: $50,000 (approximately ₹42 lakh) Holding period: 3 years Returns: 50% gain ($25,000 / ₹21 lakh) Investor: UAE-based NRI

Option A: Regular Indian Equity Mutual Fund

LTCG Tax (12.5% above ₹1.25 lakh): ₹2,46,875 Surcharge (10%): ₹24,688 Cess (4%): ₹10,863 STT: Approximately ₹4,200 Total Tax: ₹2,86,626

Net gain after tax: ₹18,13,374

Option B: GIFT City Mutual Fund

LTCG Tax: ₹0 (Section 10(4D) exemption) STT: ₹0 Cess: ₹0 Total Tax: ₹0

Net gain: ₹21,00,000

Tax savings: ₹2,86,626 (approximately $3,400)

This is a 13.6% improvement in returns, just from tax efficiency. Over longer periods with compounding, the difference becomes even more significant.

Do You Need to File ITR?

This is crucial for simplifying your NRI life.

When you DON'T need to file ITR:

If your only Indian income is from investments in Category I or II AIFs located in GIFT IFSC, and the AIFs have already deducted applicable taxes, you're exempt from ITR filing. You also don't need a PAN card in this case (Source: ICICI Bank).

When you DO need to file ITR:

If you have other Indian income (rental, property sale, mainland mutual funds). If you invest through PMS route. If you want to claim refunds for excess TDS (not applicable for most GIFT City funds). If you want to carry forward capital losses.

For most NRIs investing solely through GIFT City funds, no ITR filing is required in India. This is a massive simplification compared to regular mutual fund taxation.

👉 Tip: Even if ITR isn't mandatory, keep records of all transactions. Tax authorities can request documentation up to 6 years later.

DTAA Benefits: Double Protection

India has Double Taxation Avoidance Agreements with 90+ countries. These treaties ensure you don't pay tax twice on the same income.

For GIFT City investments:

If gains are exempt in India under Section 10(4D), DTAA doesn't need to apply. There's no Indian tax to credit against.

If gains are taxable in India (like 9% on IFSC-listed shares), DTAA allows you to claim foreign tax credit in your resident country. You avoid paying tax twice.

The recent ITAT judgment in the Anushka Sanjay Shah case is worth noting. The tribunal ruled that mutual fund units are not "shares" under the India-Singapore DTAA, potentially exempting capital gains from Indian taxation for Singapore residents (Source: Certified Financial Guardian). This could extend to other DTAA countries like UAE, Mauritius, and UK, though the matter may see further litigation.

To claim DTAA benefits, you need a Tax Residency Certificate (TRC) from your country of residence. Attach this to your ITR if filing.

Changes from Budget 2025

The Union Budget 2025 made several announcements affecting GIFT City taxation:

Tax holiday extension: IFSC businesses can claim 100% income tax exemption for any 10 consecutive years within a 15-year block. The deadline to commence operations has been extended to March 2030.

Section 10(4E) expansion: Exemption for derivative income now includes transactions with FPIs operating in GIFT City, not just banking units.

Participatory notes: Tax exemption extended to P-notes issued by non-banking FPIs based in GIFT City (effective April 2026).

Fund relocation: From April 2026, mutual funds and ETFs can relocate to GIFT City from offshore jurisdictions like Mauritius or Singapore without triggering capital gains tax. This is huge for restructuring existing investments tax-efficiently.

Ship leasing: Capital gains exemption for ship leasing businesses operating from GIFT City.

No changes were made to the core Section 10(4D) provisions benefiting NRI investors in GIFT City funds.

Common Tax Mistakes NRIs Make

Based on what we've seen helping NRIs at Belong, here are pitfalls to avoid:

Assuming all GIFT City investments are tax-free

Not true. Only specific fund structures under Section 10(4D) qualify. PMS route is fully taxable. Direct equity trading has 9% capital gains. Understand your specific investment structure.

Ignoring home country taxation

India exempting your gains doesn't mean you owe nothing. Your resident country's tax rules apply. US NRIs face PFIC issues. UK NRIs have CGT. Always check both sides.

Not getting a TRC

Without a Tax Residency Certificate, you can't claim DTAA benefits if needed. Get one from your resident country's tax authority and keep it updated.

Mixing GIFT City and regular Indian investments

This creates complexity. You'll have TDS on regular funds, no TDS on GIFT City funds. Different ITR schedules apply. If possible, consolidate in GIFT City for simplicity.

Switching funds without understanding tax implications

In regular Indian mutual funds, switching triggers capital gains. In GIFT City, if both funds are Section 10(4D) compliant, switching may remain exempt. Verify before switching.

How to Verify Your Fund's Tax Status

Before investing, confirm your fund qualifies for tax exemptions:

Check if the fund is registered with IFSCA (not SEBI). Verify it operates under IFSCA Fund Management Regulations 2022 (amended 2025). Review the fund's offering document for tax treatment section. Ask the fund house specifically about Section 10(4D) applicability. Consult a tax advisor if investing large amounts.

Belong's Mutual Funds Explorer shows GIFT City funds with their regulatory status and key features.

What Should You Do Next?

GIFT City mutual funds offer NRIs a rare combination: access to Indian market growth with global tax efficiency. For UAE residents especially, the structure can deliver completely tax-free returns.

But tax rules are complex. They change. Your specific situation matters.

Here's our recommendation:

First, verify your residential status. Your tax treatment depends on it.

Second, understand your country's rules for foreign investments. UAE is straightforward. US is complex. Others fall somewhere in between.

Third, choose the right investment structure. Retail mutual funds like DSP Global Equity Fund or Tata India Dynamic Equity Fund offer simplicity with $500 minimum. AIFs offer maximum tax efficiency but need $75,000+ commitment.

Fourth, keep records. Even if no ITR is required, maintain transaction statements, bank transfer receipts, and any TRC documents for at least 7 years.

Have questions about your specific tax situation? Join Belong's WhatsApp community where many NRIs discuss tax strategies and share experiences with GIFT City investments.

Ready to start investing? Download the Belong app to explore GIFT City FDs, mutual funds, and more. We handle the complexity. You enjoy the returns.

Sources:

• Income Tax Act Section 10(4D), 10(4E)
• IFSCA Fund Management Regulations 2022 (Amended 2025)
• Economic Times - NRI Mutual Fund Taxation
• InvestMates - GIFT City Tax Benefits
• GoINRI - GIFT City Funds Guide