GIFT City & FEMA: The Exchange-Control Framework

GIFT City sits on Indian soil, but for foreign-exchange purposes the law treats its IFSC as if it were outside India. Under the FEM (International Financial Services Centre) Regulations 2015, a financial institution or unit set up in the IFSC is a “person resident outside India” for FEMA, and its dealings are in foreign currency, not rupees. That deeming is the foundation of everything at GIFT – but it is exchange-control treatment only: it does not make the unit non-resident for income tax or other laws, and the moment money moves between the IFSC and mainland India, FEMA applies in full. This page sets out that framework – the deeming and its limits, the resident/non-resident divide, and the FEMA routes (the Liberalised Remittance Scheme, overseas investment, FDI and external commercial borrowing) by which money lawfully crosses the boundary. It is general legal information, not advice; positions are current to mid-2026, and the FEMA instruments change often, so verify at the time of use.

The framework at a glance

• The deeming: FEM (IFSC) Regulations 2015 – an IFSC unit is a “person resident outside India” for FEMA; transactions in foreign currency
• Statutory basis: SEZ Act 2005, s.18; IFSCA Act 2019 (the IFSCA is the unified regulator since 2020)
• The limit: Exchange-control only – not residence for income tax; any IFSC↔mainland flow re-engages FEMA
• Resident individuals: Liberalised Remittance Scheme (parity reform, July 2024)
• Resident investors: Overseas Investment Rules 2022 (an IFSC entity is treated as foreign)
• Non-residents: FDI under the Non-Debt Instruments Rules 2019 (in foreign currency)
• Debt: External Commercial Borrowings – Borrowing & Lending Regulations 2018, recast February 2026
• Scope: The FEMA framework only – not vehicle selection, cost or tax planning

1. Why GIFT is “foreign”: the FEMA residence deeming

The whole of GIFT’s exchange-control character flows from one device. Under the Foreign Exchange Management (International Financial Services Centre) Regulations 2015 (FEMA Notification No. 339/2015-RB, dated 2 March 2015), a financial institution – or a branch of one – set up in and recognised by the IFSC is treated as a person resident outside India for the purposes of FEMA, and its transactions are conducted in freely convertible foreign currency rather than in rupees. The IFSC itself is authorised under section 18 of the Special Economic Zones Act 2005; GIFT City, set up in December 2015, remains India’s only notified IFSC, and since 2020 it has had a single regulator, the IFSCA, under the IFSCA Act 2019.

The practical effect is that, for foreign-exchange law, an IFSC unit transacts with mainland India much as a foreign entity would, and transacts with the rest of the world largely without the frictions that apply onshore. That is the privilege GIFT confers. The rest of this page is about its boundaries – because the deeming is narrower, and more conditional, than it first appears.

2. The limits of the deeming: exchange-control only

The single most important point about the deeming is what it does not do. It is a foreign-exchange construct and nothing more. An IFSC unit is, in the apt description, a hybrid – located in India but treated as offshore for defined financial purposes. It does not become non-resident for the Income-tax Act (a unit incorporated in India remains Indian-resident for tax), and it does not become foreign for the general law. Crucially, FEMA continues to bite on the resident-facing leg: any movement of money from mainland India into the IFSC, any inbound investment into India, and any deployment of IFSC funds back with a person resident in India remains subject to FEMA in the ordinary way.

This is why “GIFT is a foreign jurisdiction” is a misleading shorthand. The accurate position is that a recognised IFSC financial unit is treated as resident outside India for FEMA; the entity, the people behind it and the money crossing the boundary remain within reach of Indian law. Keeping FEMA residence and Income-tax residence apart – they are different tests under different statutes – avoids most of the errors made about GIFT.

3. Resident or non-resident: the line every flow turns on

Because the IFSC is “foreign” only for FEMA, every question at GIFT begins with a single classification: is the party moving the money a person resident in India or a person resident outside India? It helps to picture three zones. There is the rest of the world; there is the IFSC, which FEMA treats as outside India for these purposes; and there is the domestic tariff area – mainland India. Movement between the rest of the world and the IFSC is largely frictionless. Movement across the boundary between the IFSC and mainland India is where FEMA’s routes and permissions apply.

The governing discipline is FEMA’s rule of general prohibition, specific permission: a cross-border capital-account transaction is permitted only if a route allows it, on its conditions. The sections that follow set out those routes, grouped by who is moving the money – a resident individual, a resident investor, a non-resident, or a lender – because the answer genuinely differs for each.

4. Residents – individuals: the Liberalised Remittance Scheme

A resident individual (the scheme is for individuals only, not companies, firms or trusts) may move money into the IFSC under the Liberalised Remittance Scheme, within the overall LRS limit of USD 250,000 per financial year. The position was materially widened by the RBI’s circular of 10 July 2024, which put the IFSC at par with other offshore jurisdictions: a resident may now remit to the IFSC for all permissible LRS purposes – including availing any financial service or product under the IFSCA Act within the IFSC, and routing current- or capital-account transactions in any other foreign jurisdiction through a foreign-currency account held in the IFSC.

That reform replaced a narrow 2021 regime which had allowed remittance only to invest in IFSC securities through a non-interest-bearing account. Two limits endure and matter. The standing LRS prohibitions still apply (for example, no forex margin trading or other prohibited purposes). And the GIFT-specific trap: LRS funds routed through the IFSC cannot be used to fund an entity resident in India outside the IFSC – the scheme is a door to offshore and IFSC investment, not a back route into a domestic Indian business.

5. Residents – investors: the Overseas Investment Rules 2022

When a resident (an individual or a company) invests into a GIFT entity, the governing framework is not the inbound FDI rules but the overseas investment regime – the FEM (Overseas Investment) Rules and Regulations 2022, with the RBI’s Overseas Investment Directions, notified on 22 August 2022 – precisely because an IFSC entity is treated as foreign. The investment is either Overseas Direct Investment or Overseas Portfolio Investment, depending on the instrument and the stake.

The 2022 regime was drawn with the IFSC in mind. Overseas portfolio investment expressly reaches securities and units issued by IFSC entities; and a resident individual may make direct investment into an IFSC foreign entity (including in financial services, other than banking and insurance) on the condition – an anti-layering guard – that the entity has no subsidiary or step-down subsidiary outside the IFSC in which the individual has control. The standing caution is round-tripping: a resident’s investment into an IFSC entity that re-invests into India can engage the layering and round-trip limits, and needs to be structured with those in view. The route-level detail sits in our FDI, ODI and ECB route notes.

6. Non-residents: FDI under the Non-Debt Instruments Rules

A non-resident or foreign investor coming the other way – investing into an IFSC unit or an Indian company – uses the inbound foreign-investment framework, the FEM (Non-Debt Instruments) Rules 2019. The familiar architecture applies: sectoral caps and the automatic-versus-government-route distinction, the pricing guidelines, and reporting to the RBI through the authorised-dealer bank on Form FC-GPR (issue) and FC-TRS (transfer). The investment is made, as everything at GIFT is, in foreign currency.

A notable recent addition for GIFT is the direct-listing route: a January 2024 amendment to the Non-Debt Instruments Rules permits eligible Indian companies to list their equity shares directly on the international exchanges in the GIFT IFSC (India INX and NSE IFSC), opening a foreign-currency listing avenue that did not previously exist. As always, the precise conditions and the current sectoral position should be confirmed at the time of use.

7. Debt across the boundary: external commercial borrowings and IFSC lenders

GIFT is also a lending corridor. An IFSC banking unit or finance company is a recognised non-resident lender, so a borrower in mainland India can raise External Commercial Borrowings from a GIFT lender under FEMA’s borrowing-and-lending framework. This is one of GIFT’s most-used legal channels into the Indian economy.

The framework was recast in 2026, and the change should be noted because most existing commentary predates it. The FEM (Borrowing and Lending) (First Amendment) Regulations 2026 came into force on 16 February 2026, amending the 2018 Regulations: they move the ECB regime from a prescriptive, restriction-led model toward a more outcomes-based one, introduce a dedicated end-use provision, and – significantly – remove the requirement that an ECB lender be resident in a FATF- or IOSCO-compliant country. A companion set of guarantee regulations was notified alongside. The all-in-cost ceilings, eligible-borrower list and end-use restrictions move frequently and should be checked against the current regulations and RBI master direction before any borrowing is structured.

8. The FEMA / IFSCA interface, contraventions and compounding

Two regulators share this space, and knowing which one governs a given question matters. The IFSCA is the unified regulator for the financial products, financial services and financial institutions inside the IFSC, exercising the powers otherwise held by the RBI, SEBI, IRDAI and the pension regulator so far as they relate to IFSC activity, and it has been building out its own rulebooks. But the cross-border, resident-facing FEMA powers remain with the RBI – inbound FDI, resident overseas investment, external commercial borrowing and the LRS are all administered under FEMA by the RBI through authorised-dealer banks. A single GIFT flow can therefore engage both the IFSCA (for the in-IFSC activity) and the RBI (for the cross-border leg).

Finally, the discipline that holds the framework together: a cross-border flow must fit a permitted route and carry its reporting – FC-GPR or FC-TRS for foreign investment, the ECB return for borrowings, the annual performance report for overseas investment. A flow with no permitted route, or a missed filing, is a contravention of FEMA that must be compounded with the RBI, with enforcement by the Directorate of Enforcement. At GIFT, getting the route and the paperwork right is not administrative housekeeping; it is the difference between a lawful structure and a contravention.

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