GIFT City Tax Benefits for Funds and Fund Managers

GIFT City tax benefits for funds and fund managers are in the Income-tax Act 2025. This article is specific to funds and fund managers; for the wider IFSC tax regime, see the GIFT City tax overview. A fund manager set up as a unit in GIFT IFSC can deduct 100% of its income from approved business activities for any 20 consecutive tax years out of 25 (s. 147, Income-tax Act 2025), subject to an anti-splitting condition for units starting on or after 1 April 2026. A 100% deduction is not zero tax: MAT (companies) or AMT (other persons) at 9% may still apply (s. 206), so entity form matters. After the block, the Government’s stated intention is 15% (s. 218). A Category III AIF, retail scheme or ETF in IFSC whose units (other than sponsor or manager units) are held by non-residents is a “specified fund”. It gets exemptions and a 10% rate on income linked to non-resident investors (Schedule VI; s. 210). Category I and II AIFs are pass-through (s. 224; Schedule V). Both fund outcomes depend on reading the Act’s references to the repealed 2022 IFSCA Regulations as references to the 2025 Regulations; that rests on Reg. 148(4), FM Regulations 2025, and is not confirmed by CBDT.

The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026. The Finance Act 2026 (Act No. 4 of 2026, assent 30 March 2026) changed several IFSC provisions from the same date (s. 1(2)(a)). The 1961 Act still governs years ending on or before 31 March 2026.

GIFT City tax benefits: where the provisions sit

The IFSC unit deduction: section 147

Section 147(1) allows a deduction “equal to 100%” of qualifying income to (a) a scheduled or foreign bank with an Offshore Banking Unit (OBU) in an SEZ and (b) “a unit of an International Financial Services Centre”. For an IFSC unit, qualifying income is income from “the approved business activities of any Unit of an International Financial Services Centre set up in a Special Economic Zone” (s. 147(3)(c)). “Unit” has its meaning in s. 2(zc) of the SEZ Act 2005 (s. 147(6)(b)).

How long it lasts: 20 out of 25 years

The Finance Act 2026 substituted s. 147(2) from 1 April 2026 (s. 47(a)). It applies “Irrespective of anything contained in section 80LA of the Income-tax Act, 1961”.

Existing units. The block is “twenty consecutive tax years out of twenty-five years beginning from the relevant tax year” (s. 147(2)(b)). For an IFSC unit, the “relevant tax year” is the year it obtained permission or registration under the Banking Regulation Act, the SEBI Act or the IFSCA Act 2019 (s. 147(6)(a)(ii)). So the 25-year window runs from original registration; there is no fresh 20 years from 1 April 2026. A unit still inside its s. 80LA block gets a longer block, within that window. The CBDT transition FAQs (Q8.13) apply a “remaining period” approach to s. 80-IA, but s. 147(2) applies irrespective of s. 80LA. The further 10 years in s. 147(2)(a)(ii) bridge banks with OBUs only. An IFSC unit whose earlier 10-year block has already ended is not expressly provided for, and a gap year may break the “consecutive” run. No CBDT guidance on this was found.

The anti-splitting condition: section 147(5)

An OBU or other s. 147(1) unit “commencing operations on or after the 1st April, 2026” gets the deduction “only if such unit is not formed by splitting up or reconstruction or reorganisation or transfer of a business already in existence in India” (s. 147(5)). Finance Act 2026, s. 47(b) substituted sub-sections (5) and (6).

An Indian manager moving a team, mandates or clients into a new GIFT entity must test this. The terms are undefined, so it turns on the facts.

Applying s. 147 to a Fund Management Entity

An FME must be registered with IFSCA before it operates (Reg. 3(1), FM Regulations 2025; see the GIFT City AIF setup guide for the registration steps) and gets an SEZ Letter of Approval from the Administrator (IFSCA) (SWIT workflow, steps 4–6). So it will usually be a “Unit”. A manager running a fund on a third-party platform instead of its own FME is a different case; see launching a GIFT City AIF without your own FME. An own-FME manager typically needs to:

1. Map each income stream to the approved activities in its LoA and registration (s. 147(3)(c)).
2. If it starts on or after 1 April 2026, be able to show why s. 147(5) is not breached.
3. File with its return an accountant’s report in Form No. 35 (s. 147(4)(a); Rule 69, Income-tax Rules 2026) and a copy of its IFSCA registration (s. 147(4)(b)).

Fees and carried interest. Section 147 covers income from “approved business activities”. An IFSC FME’s management fees are the clearest fit. Performance fees and carried interest need separate characterisation: carried interest received as a unit holder, for example, may be investment income rather than fee income of the unit. We found no provision or CBDT guidance specific to carried interest.

Section 218: a 15% rate on s. 147(3) income

Section 60 of the Finance Act 2026 substituted new ss. 217 and 218 for the former ss. 217 and 218, from 1 April 2026 (s. 1(2)(a)). New s. 217 deals with non-resident Indians. New s. 218 is headed “Tax on business income of Offshore Banking Units or International Financial Services Centre unit”.

It applies “Where the total income of an assessee includes income of the nature referred to in section 147(3)”. That income is taxed at 15%; the rest of total income at the rates in force.

The Memorandum explaining the Finance Bill 2026 and the Budget Speech annex both state the Government’s intention that “the business income of these units from IFSC after the expiry of period of deduction will be taxed at rate of 15%” (Memorandum, p. 48; Budget Speech 2026-27, Annexure to Part B, item 4(vi)). Section 218 itself does not use those words, but the reading fits its trigger: during the block the s. 147 deduction takes the income out of total income. What no guidance found addresses is how MAT or AMT at 9% (s. 206) interacts with the deduction in the block years.

Section 206: MAT and AMT

Section 206 contains minimum alternate tax (MAT) for companies and alternate minimum tax (AMT) for other persons. For a unit “located in an International Financial Services Centre and deriving its income solely in convertible foreign exchange”, MAT on book profit (s. 206(1)(b)(i)) and AMT (s. 206(2)(b)(ii)(I)) are each “at the rate of 9%”. The Finance Act 2026 reduced the general MAT rate in s. 206(1)(b)(ii) from 15% to 14% from 1 April 2026 (s. 59(a)(i)); it did not change the 9% IFSC rate.

The Finance Act 2026 also rewrote the MAT credit rules (new s. 206(3) and (4)). A domestic company that has exercised the option under s. 200(5) or s. 201(2) for a tax year beginning on or after 1 April 2026 can set off credit brought forward from s. 115JAA of the 1961 Act up to 25% of the tax payable on total income computed under the other provisions (s. 59(b), Finance Act 2026). Under the Memorandum’s stated policy, MAT is to “be made as final tax in the old regime and no new MAT credit may be allowed” (Memorandum, p. 49). The wider IFSC tax position is in the GIFT City tax overview.

Specified funds: Schedule VI

Which funds qualify

Note 1(g) to the Schedule VI Table defines “specified fund”:

• • a fund set up in India as a trust, company, LLP or body corporate, located in an IFSC, that (A) is registered as a Category III AIF under the SEBI AIF Regulations, 2012 or the IFSCA (Fund Management) Regulations, 2022, or (B) holds a certificate as a retail scheme or ETF meeting the conditions of the 2022 Regulations; and in either case meets the non-resident unit-holder condition below; or
• • an investment division of an OBU registered as a Category I FPI, which started operations by the cut-off date and keeps separate accounts as prescribed.

A restricted scheme following “diverse or complex trading strategies” is filed as a Category III AIF (Reg. 30(1)(b), FM Regulations 2025). IFSCA taking its placement memorandum on record is “construed as Certificate of Registration” (Reg. 31(2), Explanation); likewise a retail scheme’s offer document (Reg. 43(2)).

Finance Act 2026 changes to Note 1(g)

Finance Act 2026, s. 125 made two changes from 1 April 2026:

• Non-resident condition. New item (C) requires that “all the units other than the unit held by a sponsor or manager are held by non-residents”. The exception is a non-resident who later becomes resident under s. 6(2)–(7), if “the number of units held by such resident unit holder or holders do not exceed 5% of the total units issued” and prescribed conditions are met. The old text tested “aggregate value and the number”.
• OBU investment division. The commencement date in Note 1(g)(ii)(A) moves from 31 March 2025 to 31 March 2030.

Drafting points: item “(C)” follows alternatives (A) and (B) and in context applies to both; new sub-item (I) refers to “that tax year” without saying which (formerly, the year the units were issued); and on 26 October 2026 the official Schedule VI page still showed the pre-amendment text.

The reference to the 2022 Regulations

Several provisions still refer to the IFSCA (Fund Management) Regulations, 2022, repealed by the 2025 Regulations (Reg. 148(1)):

• Schedule VI, Note 1(g)(i) (specified fund), which Finance Act 2026, s. 125 amended without updating the reference;
• • 224(10)(a) (Category I and II “investment fund”);
• • 70(2) (“resultant fund” in a relocation);
• Schedule V (venture capital fund entry).

Reg. 148(4) says a reference to the 2022 Regulations in “any act of the Government of India” is deemed to refer to the corresponding 2025 provisions. That supports reading the Act as pointing to the 2025 Regulations, but it is an IFSCA regulation, not an amendment to the Act. No CBDT statement confirming this for tax was found, so the specified-fund and pass-through outcomes here rest on Reg. 148(4). Conversely, Regs. 30, 31(2) and 43(2) still say “Income Tax Act, 1961”.

The exemptions

Rule 139 computes the non-resident share for Sl. 1–4. For gains (Sl. 1–2) it uses the ratio of daily assets under management held by non-residents from acquisition to transfer. For income (Sl. 3–4) it uses the ratio on the date of receipt. Without a Form No. 68 filed by the return due date, the income is not exempt (Rule 139(2)–(3)). Sl. 10 uses Rule 285; the relocation rules are covered in India–Mauritius DTAA 2026: What It Means for Mauritius Funds.

Section 210: 10% on securities income of specified funds

For a specified fund, s. 210 applies “only to the extent of income that is attributable to units held by non-resident (not being a permanent establishment of such non-resident in India)” (s. 210(2)). If gross total income consists only of Sl. 1 income, no deduction is allowed under ss. 28–58, 60, 61, 93(1)(a) or (e) or Chapter VIII (s. 210(4)(a)).

For tax year 2026-27 there is “No surcharge” on a specified fund’s s. 210(1) Sl. 1 income (Finance Act 2026, s. 3(4)(b), Table Sl. 13). The position is set each year by the Finance Act.

Category I and II AIFs: pass-through

Category I and II AIFs are “investment funds”, not specified funds (s. 224(10)(a), which still cites the 2022 Regulations; this rests on Reg. 148(4), not confirmed by CBDT).

• Unit holders are taxed as if they had made the fund’s investments directly (s. 224(1)). Income keeps its character (s. 224(5)).
• The fund is exempt on everything except business income (Schedule V, Sl. 1). Business income is taxed in the fund at Finance Act rates if it is a company or firm, otherwise at the maximum marginal rate (s. 224(6)).
• Unit holders’ share of business income already taxed in the fund is exempt in their hands (Schedule V, Sl. 2).

So the specified-fund exemptions (Schedule VI, Sl. 1–4 and 9) and the 10% rate in s. 210 are not available to them. Other Schedule VI entries that are not limited to specified funds, such as Sl. 10 and Sl. 12, need separate analysis. The choice of category under Reg. 30(1) is partly a tax decision. The categories are compared in Category I, II and III AIFs in GIFT City.

Example: Category II compared with Category III

A hypothetical non-resident invests in an IFSC fund that sells Indian company shares at a gain.

In a Category II fund, business losses stay in the fund (s. 224(2)(a)). Both columns assume the 2022 references point to the 2025 Regulations (Reg. 148(4)); not confirmed by CBDT.

The fund manager safe harbour: section 9(12)

Section 9(12) carries forward s. 9A of the 1961 Act. Fund management by an “eligible investment fund” through an “eligible fund manager” is not a business connection of the fund in India, and the fund is not resident merely because the manager is in India (s. 9(12)(a), (b)). The conditions are in Schedule I (s. 9(12)(e)). The Government may, by notification, disapply or modify them where the manager “is located in an International Financial Services Centre” and “has commenced its operations on or before the 31st March, 2030” (s. 9(12)(f); formerly s. 9A(8A)). Notifications under it and the Schedule I conditions are not covered here.

Interest paid to non-residents

Interest paid by an IFSC unit to a non-resident on money borrowed on or after 1 September 2019 is exempt in the non-resident’s hands, subject to the conditions in Schedule VI (Sl. 12). This article does not cover GST or withholding.

Common questions

Is the GIFT City tax holiday now 20 years? Yes, from 1 April 2026: 20 consecutive years out of 25 for IFSC units, counted from the year of original registration (s. 147(2)(b), (6)(a)(ii)). Existing units do not get a fresh 20 years. New units must also pass the anti-splitting test (s. 147(5)). MAT or AMT at 9% may still apply for an IFSC unit deriving income solely in convertible foreign exchange (s. 206).

Are GIFT City Category III funds tax-exempt? Partly. A specified fund is exempt on Schedule VI, Sl. 1–4 income attributable to non-resident units. Other securities income attributable to non-residents is taxed at 10% (s. 210). Unit holders are exempt on income from the fund (Sl. 9). For IFSC funds this rests on Reg. 148(4), as Note 1(g) still cites the 2022 Regulations; not confirmed by CBDT.

Are Category I and II AIFs in GIFT City taxed like specified funds? No. They are pass-through “investment funds” under s. 224 and Schedule V, subject to the same 2022 reference point.

What tax rate applies to a GIFT City fund manager? Income within s. 147(3) can be fully deducted for the 20-year block (s. 147(2)(b)). MAT or AMT at 9% may still apply in those years for an IFSC unit deriving its income solely in convertible foreign exchange (ss. 206(1)(b)(i), 206(2)(b)(ii)(I)). After the block, the Government’s stated intention is 15% (s. 218; Memorandum, p. 48). Carried interest and performance fees need separate analysis.

Sources

1. Income-tax Act, 2025 – Section 147 (as amended by Act No. 4 of 2026). Income Tax Department. incometaxindia.gov.in
2. Income-tax Act, 2025 – Section 218 (page “Year: 2026”). Income Tax Department. incometaxindia.gov.in
3. Income-tax Act, 2025 – Section 210. Income Tax Department. incometaxindia.gov.in
4. Income-tax Act, 2025 – Section 206 (MAT and AMT; page “Year: 2026”). Income Tax Department. incometaxindia.gov.in
5. Income-tax Act, 2025 – Schedule VI (page “Year: 2025”, pre-Finance Act 2026 text). Income Tax Department. incometaxindia.gov.in
6. Income-tax Act, 2025 – Schedule V. Income Tax Department. incometaxindia.gov.in
7. Income-tax Act, 2025 – Section 224. Income Tax Department. incometaxindia.gov.in
8. Income-tax Act, 2025 – Section 9 (sub-s. (12)). Income Tax Department. incometaxindia.gov.in
9. Income-tax Act, 2025 – Section 70. Income Tax Department. incometaxindia.gov.in
10. Finance Act, 2026 (No. 4 of 2026), ss. 1, 2, 3, 47, 59, 60, 125. Ministry of Law and Justice, Gazette of India Extraordinary, Part II, Section 1, No. 9, 30 March 2026 (CG-DL-E-31032026-271439). Official URL for the Act PDF not located; Finance Bill 2026 as introduced: egazette.gov.in
11. Income-tax Rules, 2026 (G.S.R. 198(E)). CBDT, 20 March 2026. incometaxindia.gov.in ; Rule 69: incometaxindia.gov.in ; Rule 139: incometaxindia.gov.in ; Rule 285: incometaxindia.gov.in
12. Income-tax Act, 1961 – Section 9A. Income Tax Department. incometaxindia.gov.in
13. Income-tax Act, 1961 – Section 115UB. Income Tax Department. incometaxindia.gov.in
14. Income-tax Act, 1961 – Section 47. Income Tax Department. incometaxindia.gov.in
15. Income-tax Act, 1961 – Section 10 (cl. (4D), (23FBA), (23FBB), (23FF); page “Year: 2021”). Income Tax Department. incometaxindia.gov.in
16. FAQs on Interplay and Transition from the Income Tax Act, 1961 to the Income Tax Act, 2025 (v2.0). Directorate of Income Tax (O&MS), CBDT, 2026. incometaxindia.gov.in
17. IFSCA (Fund Management) Regulations, 2025, as amended up to 10 September 2026 (consolidated). IFSCA, 14 Sep 2026. ifsca.gov.in
18. Workflow for setting up in IFSC on the SWIT portal, v1.0. IFSCA, 7 Jul 2026. ifsca.gov.in
19. Memorandum explaining the provisions in the Finance Bill, 2026 (pp. 48–49). Ministry of Finance, 1 February 2026. indiabudget.gov.in
20. Budget Speech 2026-27, Annexure to Part B, item 4(vi). Ministry of Finance, 1 February 2026. indiabudget.gov.in

Related reading

• GIFT City AIF Setup (2026): FME Registration to Fund Launch – registration steps that precede the tax analysis.
• Category I, II and III AIFs in GIFT City: Rules Compared – how the category drives pass-through or specified fund treatment.
• Launch a GIFT City AIF Without Your Own FME – the platform route and its effect on who holds the FME.
• Who Can Invest in a GIFT City Fund: A Manager’s Guide – the investor base that the non-resident condition depends on.
• India–Mauritius DTAA 2026: What It Means for Mauritius Funds – relocation exemptions and treaty position.

This article is general information and not legal advice. The legal framework and its application change over time; please take advice on your specific circumstances.