We've written extensively about GIFT City's tax benefits. Now let's talk about what could go wrong.
At Belong, we believe informed investors make better decisions. Yes, we help NRIs invest in GIFT City. But we also want you to understand the risks before committing your money. No investment is perfect, and GIFT City mutual funds are no exception.
Here's an honest assessment.
The Regulatory Uncertainty Risk
GIFT City operates under IFSCA (International Financial Services Centres Authority), established only in 2020. Compare this to Singapore's MAS (60+ years) or Dubai's DFSA (20+ years).
What this means for you:
Regulations are still evolving. In 2024, IFSCA prohibited certain US-based ETF investments, disrupting existing investors' plans. (Source: Investmates) Investment concentration limits changed with new regulations introducing 33.33% caps in single investee companies.
The tax holiday currently extends until March 2030. But there's no guarantee it won't change with future budgets. If tax benefits are modified or withdrawn, the primary advantage of GIFT City funds diminishes significantly.
👉 Tip: Don't put all your eggs in the GIFT City basket. Diversify across regular Indian mutual funds and other investment avenues.
Lower Liquidity Than Traditional Funds
GIFT City mutual funds have fewer investors and lower trading volumes than mainstream Indian mutual funds. A fund like HDFC Flexi Cap has over ₹60,000 crore in assets. Most GIFT City funds manage a fraction of that.
Why liquidity matters:
When you want to redeem, lower liquidity can mean:
- Longer processing times
- Potential impact on NAV if large redemptions occur
- Exit loads that restrict quick withdrawals
AIFs in GIFT City typically have 3-year lock-ins. You cannot access that capital regardless of circumstances. (Source: iNRI)
For emergency funds or short-term goals, GIFT City funds aren't ideal. Stick to liquid funds or NRI fixed deposits for money you might need soon.
Currency Risk Works Both Ways
GIFT City funds are USD-denominated. This protects you from rupee depreciation. But it also creates exposure in the opposite direction.
Scenario to consider:
You're a UAE NRI planning to return to India in 5 years. You invest $50,000 in a GIFT City fund. The fund grows 50% to $75,000.
But if the rupee strengthens from ₹84 to ₹75 per dollar during this period (unlikely but possible), your ₹63 lakh becomes ₹56.25 lakh in rupee terms. You'd have been better off in rupee-denominated funds.
For NRIs in countries with currencies not pegged to USD (UK, Australia, Europe), there's additional AUD-USD or GBP-USD fluctuation risk on top of investment returns.
Currency hedging is possible but adds costs and complexity.
Limited Fund Options
As of late 2025, GIFT City offers far fewer mutual fund choices than mainland India. You have access to perhaps 20-30 funds versus 1,500+ schemes in regular Indian markets.
Practical implications:
- Fewer category options (limited sectoral, thematic, or niche funds)
- Less competition means potentially higher expense ratios
- You may not find exact equivalents of your preferred funds
The ecosystem is growing. Tata launched their Dynamic Equity Fund in September 2025. More AMCs are entering. But today, your options remain constrained compared to traditional routes.
Use our Mutual Funds Explorer to see currently available GIFT City options.
Tax Complexity in Your Home Country
Here's what many articles gloss over: GIFT City returns are tax-free in India, not necessarily in your country of residence.
Country-specific situations:
Country | Tax Treatment |
|---|---|
UAE, Singapore | No capital gains tax (truly tax-free) |
UK | Capital gains tax applies |
USA | Complex PFIC rules may apply |
Australia | CGT on foreign investments |
For US NRIs, GIFT City funds might trigger Passive Foreign Investment Company (PFIC) rules, creating punitive tax treatment and complex reporting requirements. Consult a cross-border tax advisor before investing.
Even in tax-free jurisdictions, you may need to report foreign holdings. UAE doesn't have income tax, but other compliance requirements exist.
👉 Tip: Get clarity on your home country's tax treatment before investing. The "tax-free" benefit applies only to Indian taxation.
Newer Track Record
Most GIFT City mutual funds launched in 2022-2025. You're looking at 2-3 years of performance data at best.
Why this matters:
- No track record through multiple market cycles
- Difficult to assess fund manager consistency
- Past performance (limited as it is) may not predict future results
Compare this to established Indian funds with 10-15 year histories showing how they performed during 2008, 2020, and 2022 corrections. That data simply doesn't exist for GIFT City funds.
You're essentially trusting the AMC's reputation and the underlying investment strategy rather than proven GIFT City-specific performance.
Operational and Infrastructure Risks
GIFT City is still developing. While it has world-class infrastructure, the financial ecosystem isn't as deep as Singapore or Dubai.
Considerations:
- Fewer service providers and advisors specialized in GIFT City
- Banking relationships still being established
- Dispute resolution mechanisms less tested than mature IFSCs
The regulatory framework is robust under IFSCA. Major Indian banks (SBI, ICICI, HDFC) operate IBUs here. But the ecosystem's youth means some processes may be less streamlined than traditional investment routes.
Who Should Still Consider GIFT City Funds?
Despite these risks, GIFT City funds make sense for specific investor profiles:
Good fit:
- UAE/Singapore NRIs in zero-tax jurisdictions (genuine tax-free returns)
- Long-term investors (5+ years) comfortable with newer products
- Those seeking USD-denominated India exposure
- Investors diversifying alongside (not replacing) traditional funds
Poor fit:
- US NRIs (PFIC complications outweigh benefits for most)
- Short-term investors needing liquidity
- Those uncomfortable with regulatory evolution
- Investors wanting specific fund categories unavailable in GIFT City
For a balanced view, read our GIFT City pros and cons guide.
Our Honest Recommendation
We help NRIs invest in GIFT City through Belong. We believe in the product. But we also believe in transparency.
Start small. Don't move your entire portfolio to GIFT City. Begin with 20-30% of your India allocation. See how the experience feels. Understand the redemption process. Then scale up if comfortable.
Diversify. Combine GIFT City funds with regular Indian mutual funds, NRE fixed deposits, and other instruments. No single avenue should dominate your portfolio.
Stay informed. GIFT City regulations evolve. Budget announcements matter. Join our WhatsApp community where we share regulatory updates and discuss implications.
The tax benefits are real. The risks are also real. Make your decision with both in mind.
Ready to explore GIFT City with guidance? Download the Belong app
Sources: IFSCA, Investmates, iNRI, Edelweiss MF, NRI Helpline
