GIFT City – Framework on Fund Management Entity

India’s GIFT City (Gujarat International Finance Tec-City) has emerged as a strategic international financial hub, attracting global and domestic fund managers with its favorable regulatory and tax landscape. The introduction of the International Financial Services Centres Authority (Fund Management) Regulations, 2022, or FME Regulations, has laid the groundwork for a streamlined and structured approach to fund management in this zone. This blog breaks down the framework for fund management entities (FMEs), various categories of fund schemes, the role and structure of Family Investment Funds (FIFs), taxation benefits under the IFSC regime, and the broader comparison with SEBI-regulated funds in India.

Background

GIFT City was declared a multi-service Special Economic Zone in 2015 and has since been positioned as an International Financial Services Centre (IFSC). The International Financial Services Centres Authority (Fund Management) Regulations, 2022, were introduced to regulate fund managers operating in the IFSC. These regulations apply to Fund Management Entities (FMEs) and not directly to the funds themselves.

FMEs need to be registered with IFSCA, and must meet specific conditions to launch schemes. GIFT City offers a range of tax and regulatory benefits that make it highly attractive for fund managers and investors alike.

Fund Management Entity

FMEs in GIFT City are categorized as:

Authorized FMEs
Registered FMEs (Non-Retail)
Registered FMEs (Retail)

Key Aspects – FME Registration Categories

Particulars	Authorized FME	Registered FME (Non-Retail)	Registered FME (Retail)
Regulatory Oversight	Low	High	High
Types of Schemes/Funds	Venture Capital, Early-stage ventures, Family Investment Fund	Venture Capital, Restricted Schemes, PMS, REIT/InvIT Managers	All types including Retail Schemes
Minimum Net Worth	USD 75,000	USD 500,000	USD 1,000,000
Track Record	Experienced employees required	Holding company: 5+ years, $200M AUM, 25,000+ investors	Similar to Non-Retail plus experienced KMP
KMP	1 (Principal Officer)	2 (Principal & Compliance Officer)	3 (Principal, Compliance, Fund Management KMP)
Legal Structure	Company, LLP, Branch	Company, LLP, Branch	Company, Branch

Key Aspects – Schemes

Venture Capital Schemes

Can be launched by any FME
Legal structure: Company, LLP, Trust
Corpus: USD 5M to USD 200M
Max 50 investors
Contribution:
- Accredited: No minimum
- Employees/Directors/Partners: USD 60,000
- Others: USD 250,000
Close-ended, minimum 3-year tenure
Considered AIF Category I

Non-Retail Schemes

Launched by Registered FMEs
Max 1,000 investors
Corpus: Minimum USD 5M
Similar contribution structure but lower than venture capital schemes
Considered AIF Category based on investment mix
Can be open or close-ended (minimum 1-year tenure)

Retail Schemes

Launched by Registered FMEs (Retail)
Minimum 20 investors
One investor cannot hold more than 25%
Corpus: Minimum USD 5M
Close-ended schemes: Minimum USD 10,000 investment
Considered AIF Category III

Key Aspects – Family Investment Funds (FIFs)

FIFs are self-managed funds pooling money from a single family. They can be structured as a company, LLP, or trust with identifiable beneficiaries.

Key points:

Open or close-ended
Can borrow or leverage as per risk policy
No net worth requirement, but minimum corpus of USD 10M within 3 years
“Single family” includes lineal descendants and entities controlled by them
Must register as Authorized FME if investing in securities
Not considered AIF for tax purposes
Can invest in both financial and physical assets including real estate, art, bullion, etc.

IFSC Tax Implications – General Overview

Entities in IFSC:

Are considered Indian residents for tax
Receive 100% deduction on business profits for 10 out of 15 years
Are subject to a concessional MAT/AMT of 9% (plus applicable surcharge)
Face no complications under Place of Effective Management (POEM) rules

IFSC Tax Implications – Fund Management Entities

Category I & II AIFs

Pass-through status granted under Section 115UB
Income other than business is exempt for funds under 10(23FBA)
Business income is taxable but eligible for 80LA deduction
Withholding:
- 10% for residents
- Rates in force for non-residents
For non-resident investors, offshore fund income is deemed a direct investment outside India and hence not taxable

Category III AIFs

No pass-through status
All income taxable in hands of fund
80LA deduction available on approved business income
Specified funds (where all units are held by non-residents except sponsor/manager) get additional exemptions under 10(4D)
In investor’s hands:
- Income taxable as per type
- Specified fund unit holders get exemption under 10(23FBC)

Exchange Control Implications – Investment in Funds in IFSC

As per FEMA IFSC Regulations, entities in IFSC are “persons resident outside India”
Investment by Indian residents is subject to ODI (Overseas Direct Investment) regulations
Contributions to IFSC investment vehicles are considered OPI (Overseas Portfolio Investment)
Indian entities not in financial services can still invest in IFSC funds
Resident individuals can invest within LRS limit ($250,000) but cannot have downstream control outside IFSC
ODI rules don’t apply to investments made by IFSC entities outside India

IFSC AIFs vs SEBI AIFs

Criteria	SEBI AIF	IFSC FME
Regulation	Fund registration	FME registration
Leveraging	Limited, short-term only	Permitted with conditions
Investment Restrictions	Thresholds apply	No thresholds
Overseas Investment	Needs SEBI approval, limit reached	No restrictions or limits
Tax Holiday	Not available	Available for business income
Pass-through	Cat I & II only	Cat I & II with tax holiday