As GAAR and the Principal Purpose Test make Mauritius- and Singapore-routed structures riskier by the year, GIFT City offers foreign investors something the treaty routes never could: tax certainty that does not depend on proving substance after the fact.
Key Takeaways
- India's GAAR and the treaty-level Principal Purpose Test allow authorities to disregard offshore holding structures years after closing: a structure can look compliant on closing day and still be unwound later.
- GIFT City's benefits are statutory, not treaty-dependent: a ten-year 100% tax holiday under Section 80LA, exemptions from STT, CTT and stamp duty, and pass-through treatment for Category I and II AIF income.
- A single IFSC AIF can now invest through the FPI, FVCI and FDI routes interchangeably from one vehicle, choosing the route deal by deal.
- The scale-up is real: from roughly 20 AIFs and $4.6 billion in commitments in January 2022 to 194 Fund Management Entities and 310+ schemes, with more than $5 billion in foreign commitments in FY2025–26 alone.
For much of the last three decades, the standard route into an Indian target ran through a treaty jurisdiction, usually Mauritius, later Singapore. The intermediate holding company existed largely for the tax treaty attached to it, which made an eventual exit cheaper and more predictable than investing directly. Those routes have grown steadily riskier. India's General Anti-Avoidance Rule and the Principal Purpose Test grafted onto its treaties give authorities the power to look through a holding structure that lacks real commercial substance and tax the transaction as though the intermediary never existed. Since 2015, GIFT City has offered a different proposition: invest in India directly, with tax benefits that once required routing through another jurisdiction, built inside Indian law rather than around it.
The Old Route's Rising Legal Risk
The treaty structures worked on a simple logic: incorporate a holding company in Mauritius, Singapore or the Netherlands, route the investment through it, and rely on the bilateral treaty to reduce or eliminate capital gains tax on exit. What changed is the test applied after the fact. Under Chapter X-A of the Income-tax Act, GAAR lets authorities treat an arrangement as an “impermissible avoidance arrangement” where a tax benefit was a main purpose and genuine commercial substance is absent, at which point the offshore entity is disregarded entirely. Most Indian treaties now also carry the OECD Multilateral Instrument's Principal Purpose Test, denying benefits wherever obtaining them was a principal purpose of the arrangement.
A structure can look entirely compliant on closing day and still be unwound years later, once authorities examine whether the holding company had real staff, real decision-making and real business activity.
How GIFT City Restructures the Deal
The IFSCA (Fund Management) Regulations, 2025, consolidating earlier SEBI and IFSCA frameworks, set out how Alternative Investment Funds registered in the IFSC function as the investment vehicle. An IFSC AIF accepts foreign-currency commitments from non-residents, NRIs, eligible Indian institutions, and resident individuals investing under the RBI's Liberalised Remittance Scheme. Crucially, IFSC AIFs can now invest into India as Foreign Venture Capital Investors, Foreign Portfolio Investors, or through the Foreign Direct Investment route, all from the same fund. Each route carries different constraints: FPI suits portfolio-style stakes and caps how large a position can grow before reclassification; FVCI targets unlisted, early-stage companies with relaxed pricing norms; FDI is the route for a controlling stake in a mature company, with its sectoral approvals and pricing requirements. Earlier, GIFT-based AIFs were confined to the FPI route alone.
Threshold requirements are deliberately institutional: a minimum scheme corpus of $3 million, minimum investor commitments of $150,000 (reduced to $40,000 for employees and directors of the manager), and a continuing manager or sponsor interest of at least 2.5% of corpus or $750,000, rising to 5% or $1.5 million for Category III funds. Unlike domestic Category II AIFs, IFSC AIFs face no fixed leverage ceiling. The market has responded: from just over 20 AIFs with roughly $4.6 billion of commitments in January 2022 to 194 Fund Management Entities managing more than 310 schemes by 2025, and over $5 billion in foreign commitments in FY2025–26, more than double the amount raised domestically in the same period.
One Vehicle, Three Routes, Five Steps
Setting up runs through five steps: incorporate in GIFT SEZ and secure a Letter of Approval from the Unit Approval Committee; register as a Fund Management Entity with IFSCA under one of three tiers (Authorised, Registered Non-Retail, or Registered Retail); launch the scheme as a Category I, II or III AIF by filing a private placement memorandum, with a “Green Channel” allowing venture and accredited-investor schemes to open for subscription immediately on filing; open banking relationships with an IFSC Banking Unit, which can also lend in foreign currency for acquisition financing; and then invest into Indian targets, choosing FPI, FVCI or FDI deal by deal. A foreign investor that does not want its own fund infrastructure can simply come in as a limited partner in an existing GIFT City AIF, contributing above the $150,000 threshold and receiving pass-through tax treatment.
Tax Certainty by Statute, Not Treaty
IFSC units can claim a 100% tax holiday under Section 80LA for any ten consecutive years within their first fifteen, with exemptions from securities transaction tax, commodity transaction tax and stamp duty on qualifying transactions. For Category I and II AIFs, non-business income passes through to investors without fund-level tax, and a later amendment extended comparable treatment under Section 10(4D) to retail schemes and ETFs. The decisive difference from the Mauritius route: none of this depends on demonstrating commercial substance to a treaty partner after the fact: the exemption exists because the entity is registered and operating inside the IFSC. Regulatory friction falls too: where a transaction touching banking, securities, insurance and pensions once needed sign-offs from the RBI, SEBI, IRDAI and PFRDA, inside the IFSC all of it sits under IFSCA. And under the FEMA (IFSC) Regulations, 2015, IFSC units are treated for exchange-control purposes much like entities outside India, letting capital move without case-by-case RBI approvals. On exit economics, a 2025 amendment settled a long-running ambiguity by deeming Category I and II AIF gains on securities to be capital gains from AY 2026–27, and extended the tax-neutral fund-relocation deadline to March 31, 2030, certainty that lets an acquirer underwrite a sharper entry price.
What Has Changed, and What Hasn't
None of this means Mauritius or Singapore will be abandoned. GIFT City remains a young jurisdiction without decades of case law, without a dedicated arbitration institution comparable to the DIFC-LCIA or SIAC, and with disputes still defaulting to India's civil courts and the IBC, neither designed for IFSC-specific cross-border structures. For a very large or contentious transaction, that gap is a legitimate reason to stay with an established venue for now. But for mid-market transactions and fund-level structuring, where speed and cost outweigh a long legal track record, GIFT City offers what the offshore hubs never could: the tax efficiency and financing flexibility of an offshore centre, without the treaty-dependency risk hanging over every Mauritius- and Singapore-routed deal.
