Tax Exemption vs Tax Deferral in GIFT City - What NRIs Must Know

"Your GIFT City returns are tax-free."

Every NRI has heard this claim. It's plastered across bank brochures, investment platforms, and financial advisor pitches. 

But here's what they don't tell you: "tax-free" can mean two very different things.

At Belong, we've had hundreds of conversations with UAE and UK NRIs who invested in GIFT City believing their gains were permanently exempt from taxation. Some were right. 

Others discovered, painfully, that their gains were merely deferred, and the tax bill eventually arrived.

This distinction between tax exemption and tax deferral isn't academic. It determines whether you keep 100% of your returns or eventually surrender 20-40% to tax authorities. It affects your return-to-India planning. 

It changes which GIFT City products make sense for you.

This guide breaks down exactly what each term means, which GIFT City investments fall into which category, and how to structure your portfolio so you're not surprised later.

The Core Difference: Exemption vs Deferral

Let's start with crystal-clear definitions.

Tax exemption means the income is permanently excluded from taxation. The government has decided this income will never be taxed, by anyone, under the relevant tax laws. The liability doesn't exist. It doesn't get pushed to the future. It simply doesn't apply.

Tax deferral means the tax liability exists but is postponed. You don't pay today, but you will pay eventually. The tax bill is delayed, not eliminated. Common deferral mechanisms include reinvestment provisions, remittance-based taxation, and status-dependent triggers.

Here's an analogy: Exemption is like having a debt forgiven. Deferral is like getting a payment extension. With forgiveness, you owe nothing. With extension, the debt remains, it just isn't due yet.

👉 Tip: When any financial product claims "tax-free," immediately ask: "Tax-free forever, or tax-free for now?" The answer determines your real return.

Why This Distinction Matters for NRIs

For UAE-based NRIs, this distinction has enormous practical impact.

The UAE has zero personal income tax. So if your GIFT City gains are truly exempt in India and you live in the UAE, your total tax bill is zero. You keep every dirham of returns.

But if your GIFT City gains are merely deferred in India, several scenarios could trigger eventual taxation. Returning to India and becoming a Resident. Changing your residential status. Repatriating funds to certain countries. Policy changes before you realize the gains.

Consider two NRIs, both in Dubai, both investing $100,000 in GIFT City for 10 years at 12% annual returns. Both earn approximately $210,000 in gains.

NRI #1 invests in a product with true tax exemption. Final amount: $310,000. Tax paid: Zero.

NRI #2 invests in a product with tax deferral, then returns to India in Year 8. Gains taxed at 20% as a Resident. Tax paid: ~$42,000. Final amount: ~$268,000.

Same investment. Same duration. Same returns. But one NRI walks away with $42,000 more because of the exemption vs deferral structure.

Which GIFT City Products Offer True Tax Exemption?

Not all GIFT City investments are created equal. Let's map the tax treatment precisely.

GIFT City Mutual Funds Under Section 10(4D)

Retail mutual funds registered with IFSCA under the Fund Management Regulations 2022 (amended 2025) offer genuine tax exemption for non-resident investors. Section 10(4D) of the Income Tax Act exempts income arising to a non-resident from transfer of units of specified funds (Source: Income Tax Act).

This is true exemption, not deferral. The income is excluded from Indian taxation entirely for non-residents. No TDS is deducted. No ITR filing is required if this is your only Indian income.

Funds like Tata India Dynamic Equity Fund and DSP Global Equity Fund fall into this category. The minimum investment starts at just USD 500, making this accessible to most NRIs.

For UAE residents, this means 0% total tax: exempt in India, no capital gains tax in UAE.

Category III AIFs Investing in Specified Securities

Alternative Investment Funds classified as Category III that invest in Indian equity mutual funds are fully exempt from capital gains tax in India under Section 10(4D). The minimum investment dropped from USD 150,000 to USD 75,000 in February 2025 (Source: IFSCA Circular, February 2025).

This is exemption, not deferral. The gains are permanently excluded from Indian tax for non-residents.

GIFT City USD Fixed Deposits (IBU Deposits)

Interest earned on foreign currency deposits with IFSC Banking Units is exempt from Indian income tax for non-residents. This exemption comes from the IFSC's treatment as "non-resident" territory under FEMA.

Critically, this exemption persists even after you return to India and become a Resident. Unlike NRE FDs that lose tax-free status when you become Resident, GIFT City FD interest remains exempt regardless of your residential status (Source: PrimeInvestor).

This is one of the few products where the exemption survives a status change.

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 under Section 10(4E). The Finance Bill 2025 expanded this to include transactions with Foreign Portfolio Investors in GIFT City (Source: Finance Bill 2025).

👉 Tip: GIFT City FDs are particularly valuable for NRIs planning to return to India. The tax exemption doesn't disappear when your residential status changes, unlike NRE FD interest.

Which GIFT City Products Create Tax Deferral?

Some GIFT City investments don't eliminate tax. They postpone it.

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 PMS structure doesn't provide the Section 10(4D) exemption. Your gains are taxable in India. The only "deferral" is that you pay when you realize the gains, not annually on unrealized appreciation.

Short-term capital gains face 24% tax (post Budget 2024 increases). Long-term gains face 15%. Dividends carry 20% base rate, rising to 24% with surcharges (Source: Budget 2024).

This isn't tax-free by any measure. Avoid PMS if tax efficiency is your primary goal.

Direct Equity Trading on IFSC Exchanges

Trading stocks directly on NSE IFSC or India INX triggers capital gains tax at 9% for non-residents. Lower than mainland India's 12.5-20% rates, yes. But not exempt.

This is concessional taxation, not exemption. You pay less, but you do pay.

Investments That Change Treatment on Status Change

Many GIFT City mutual fund structures are exempt only while you're a non-resident. Once you become a Resident Indian (after the RNOR period ends), the treatment may change.

Capital gains from that point forward may become taxable depending on how the gains are classified. This creates a form of deferral: exempt while NRI, taxable as Resident.

The UK Non-Dom Example: Classic Tax Deferral

UK-based NRIs face a different situation that perfectly illustrates tax deferral.

Under UK tax law, Non-Domiciled residents (Non-Doms) may not pay UK tax on foreign income unless they "remit" (bring) it into the UK. This is called the remittance basis of taxation.

GIFT City gains kept within the GIFT City ecosystem might remain tax-deferred in the UK, provided they are not repatriated to a UK bank account (Source: GOV.UK).

This isn't exemption. This is deferral. The moment you remit those gains to the UK, tax becomes due. Keep them offshore, and you defer indefinitely. But the liability exists; it's just not triggered.

The previous £2,000 exemption for small foreign income no longer applies from 6 April 2025 (Source: GOV.UK). UK NRIs must now report all foreign income on their Self Assessment tax return, regardless of whether they remit it.

If you're a UK-based NRI, your GIFT City gains are exempt in India under Section 10(4D). But UK tax applies at your marginal rate when remitted. Since GIFT City has zero TDS, you'll likely owe UK tax on the full amount.

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.

👉 Tip: UK NRIs should understand that "tax-free in India" doesn't mean tax-free globally. Your UK tax liability depends on remittance timing and your domicile status.

What Happens When You Return to India?

This is where exemption vs deferral matters most.

During RNOR Period (First 2-3 Years After Return)

When you return to India, you typically get RNOR (Resident but Not Ordinarily Resident) status for 2-3 years. During this window, foreign income is not taxable in India.

If you liquidate GIFT City investments during RNOR, the gains aren't taxable in India. This applies to both exempt and non-exempt structures. The RNOR period acts as a protective buffer.

Timing matters: If you returned in January 2024, your likely RNOR years are FY 2024-25, 2025-26, and 2026-27. Plan redemptions accordingly.

After Becoming Ordinary Resident (ROR)

Once RNOR status ends and you become ROR, the picture changes.

Products with true exemption: GIFT City USD FDs remain tax-free even as ROR. Interest is exempt regardless of residential status.

Products with status-dependent exemption: Many GIFT City mutual fund exemptions under Section 10(4D) are specifically for non-residents. Once you're a Resident, the exemption may not apply. Capital gains from that point become taxable at standard Indian rates (12.5% LTCG, 20% STCG for listed securities).

Products that were always taxable: PMS and direct equity trading were taxable even as NRI. They remain taxable as Resident. No change.

The key insight: NRI-specific exemptions disappear when you're no longer an NRI. The exemption was for your status, not the product itself.

Exemption vs Deferral: A Side-by-Side Comparison

The "Tax-Free" Marketing Problem

Financial products love the "tax-free" label. It's compelling. It sells. But it's often imprecise.

When a GIFT City product claims "tax-free," it could mean:

1. Exempt in India for non-residents (true exemption, but only while you're NRI)
2. Exempt in India permanently (true exemption regardless of status)
3. No TDS deducted (doesn't mean no tax liability)
4. Tax-efficient compared to mainland India (lower tax, not zero)
5. Deferred until remittance/status change (deferral, not exemption)

A member from our Belong 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. He ended up paying UK tax on gains he thought were "tax-free."

👉 Tip: Always ask three questions: (1) Tax-free in which jurisdiction? (2) Tax-free for which residential status? (3) Tax-free permanently or until a trigger event?

How to Verify a Product's Tax Treatment

Before investing, get clarity on the exact tax treatment.

Questions to Ask the Fund House or Bank:

1. Is this fund registered under IFSCA Fund Management Regulations 2022?
2. Does Section 10(4D) apply to investor redemptions?
3. What happens to my tax treatment if I become a Resident Indian?
4. Is there TDS on redemption?
5. Do I need to file ITR in India for this investment?

Documents to Review:

The fund's offering document should clearly state the tax treatment for different investor categories. Look for specific references to Income Tax Act sections, not just marketing language like "tax-efficient."

Red Flags:

Vague language like "favorable tax treatment" without citing specific provisions. Claims that sound too good ("zero tax regardless of where you live"). Reluctance to put tax treatment in writing.

Strategic Planning: Maximizing Exemptions, Managing Deferrals

If you're a UAE NRI with no plans to return to India, your strategy is straightforward. Invest in products with true exemption under Section 10(4D). GIFT City mutual funds, Category III AIFs, and USD FDs all work. You pay zero tax in India, zero tax in UAE. Done.

If you're planning to return to India, the calculus changes. Consider these approaches:

Strategy 1: Invest, Then Liquidate During RNOR

Invest now as NRI. Accumulate tax-free returns. When you return, liquidate during your 2-3 year RNOR window. Foreign income isn't taxable during RNOR. Move proceeds to domestic investments optimized for Resident taxation.

Strategy 2: Hold GIFT City FDs for Post-RNOR

GIFT City USD FDs remain tax-free even after RNOR ends. If you want continued tax exemption after becoming Resident, FDs are the primary option. The interest is exempt regardless of status.

Strategy 3: Maintain NRI Status Strategically

If your RNOR period is ending but you have significant unrealized GIFT City gains, consider whether extended travel abroad could reset your status. Spending under 182 days in India could revert you to NRI status. Not always practical, but worth considering for large portfolios.

If you're a UK NRI, add remittance timing to your strategy. Keep GIFT City gains offshore if you're in the UK higher tax bracket. Remit during years with lower income. Use the deferral structure intentionally.

👉 Tip: The RNOR window is your most valuable planning tool. Mark your calendar with the expected end date and plan major redemptions before it closes.

Common Mistakes NRIs Make

Mistake 1: Assuming All GIFT City Investments Are Tax-Free

PMS is taxable. Direct equity is taxable (at concessional 9%). Not everything in GIFT City gets the Section 10(4D) exemption.

Mistake 2: Ignoring Home Country Taxation

India exempting your gains doesn't mean your residence country will. UK NRIs owe UK tax. US NRIs face PFIC complications. German NRIs pay German tax. Always check both sides.

Mistake 3: Not Planning for Status Changes

NRI exemptions disappear when you're no longer NRI. If you plan to return, factor this into your investment timeline. Don't hold exempt investments beyond your status change without understanding the consequences.

Mistake 4: Confusing "No TDS" with "No Tax"

TDS is tax deducted at source. Absence of TDS doesn't mean no tax liability exists. Your obligation to pay and report tax is separate from whether TDS was withheld.

Mistake 5: Not Getting Written Confirmation

Verbal assurances about tax treatment mean nothing. Get written confirmation citing specific tax law provisions. If the advisor can't provide this, find one who can.

What About the Tax Holiday Extension to 2030?

Budget 2025 extended GIFT City's tax holiday to March 2030 for businesses commencing operations (Source: Union Budget 2025). This creates policy certainty for the next five years.

For NRI investors, this means:

• The existing exemptions under Section 10(4D) and 10(4E) remain intact
• No immediate risk of exemptions being withdrawn
• Confidence to make long-term investment decisions

But note: this extension applies to the GIFT City tax framework, not to your personal tax situation. If you become Resident, your status-dependent exemptions still disappear, regardless of the 2030 extension.

The extension protects the supply side (funds, banks, businesses operating in GIFT City). Your demand-side benefits depend on your residential status.

Real Scenario: Calculating the Difference

Let's make this concrete with numbers.

Scenario: Dubai NRI, $100,000 Investment, 10 Years

Assume 12% annual returns. Final corpus: approximately $310,000. Gains: $210,000.

If Tax Exempt (GIFT City MF Under Section 10(4D)):

• Indian tax: Zero (exempt under 10(4D))
• UAE tax: Zero (no capital gains tax)
• Final amount: $310,000

If Tax Deferred (Returns to India in Year 8, Becomes ROR):

• Years 1-7 gains while NRI: Exempt
• Years 8-10 gains as ROR: Taxable
• Approximate taxable gains: $80,000
• Tax at 12.5% LTCG: $10,000
• Final amount: $300,000

If Taxable Throughout (PMS):

• All gains taxable at 15% LTCG (non-resident rate)
• Tax on $210,000: $31,500
• Final amount: $278,500

The difference between exempt and taxable: $31,500 over 10 years.

The difference between exempt and deferred (with return to India): $10,000.

These aren't hypothetical numbers. This is real money that stays in your pocket or goes to taxes.

Track Market Trends with the Right Tools

Understanding tax treatment is half the battle. Tracking your investments is the other half.

Use Belong's Gift Nifty tracker to monitor GIFT City market movements. Compare FD rates across GIFT City IBUs to find the best returns on exempt interest income.

Your Next Steps

Tax exemption vs deferral isn't just jargon. It determines whether you keep your full returns or share them with tax authorities later.

For most UAE-based NRIs, the path is clear: GIFT City mutual funds and USD FDs offer genuine exemption. You invest, you earn, you keep. No deferred bills, no surprises.

For NRIs planning to return to India, timing matters. Use your RNOR window strategically. Position GIFT City FDs for post-return tax efficiency. Don't let exempt investments become taxable by holding past your status change.

Join our WhatsApp community where thousands of NRIs discuss GIFT City tax planning, share experiences, and get answers from others who've navigated these exact questions.

Download the Belong app to compare GIFT City investment options, track rates, and start building a truly tax-efficient portfolio.