Inside India, Outside for FEMA: The Legal Status of a GIFT IFSC Unit

A company incorporated in GIFT IFSC is an Indian company. For foreign exchange purposes, however, it is treated as a person resident outside India. It also sits within a Special Economic Zone that is deemed to be outside India’s customs territory for authorised operations. For income-tax purposes, it remains resident in India. These classifications do not contradict one another; each applies under a different legal framework. Understanding the legal status of entities in GIFT City IFSC requires examining the specific laws governing each of these classifications.

The Four Legal Statuses of IFSC Entities in GIFT City

Layer One: An SEZ Unit

GIFT IFSC is set up under section 18 of the Special Economic Zones Act, 2005 (SEZ Act). Section 2(q) defines an International Financial Services Centre by reference to Central Government approval under that section. Section 2(zc) defines a “Unit” to include “a Unit in an International Financial Services Centre”.

An IFSC entity is therefore an SEZ unit before it is anything else. That status carries two practical consequences.

• Approval and authorised operations. An entity must hold SEZ approval for its authorised operations, in addition to any IFSCA registration. (Article 3 explains the procedure.)
• Customs fiction. Section 53(1) of the SEZ Act deems an SEZ to be “a territory outside the customs territory of India for the purposes of undertaking the authorised operations”. The fiction is expressly purposive. It concerns customs, and flows into indirect-tax treatment. It does not make the SEZ foreign territory for other purposes.

The IFSCA Act, 2019 builds on this foundation rather than replacing it. Under section 2, it applies to IFSCs “set up under section 18” of the SEZ Act.

Layer Two: A Person Resident Outside India under FEMA

The most commercially significant characterisation comes from the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 (the FEMA IFSC Regulations). The RBI made these regulations under section 47 of the Foreign Exchange Management Act, 1999 (FEMA).

Regulation 3 provides that any financial institution, or branch of a financial institution, set up in the IFSC and permitted or recognised as such by the Government of India or a regulatory authority “shall be treated as a person resident outside India”.

Regulation 4 provides that such an institution is to conduct business in such foreign currency, and with such persons (resident or otherwise), as the concerned regulatory authority determines. A proviso inserted in January 2020 allows the RBI, by general or specific permission, to let such an institution conduct business in Indian rupees with persons it determines.

Regulation 5 provides that, save as otherwise provided or directed by the RBI, nothing in any other FEMA regulations applies to such an institution.

Three points about scope are often missed.

1. The deeming is confined to financial institutions. Regulation 2 defines a financial institution by reference to entities “engaged in rendering financial services or carrying out financial transactions”. Its explanation lists examples such as banks, non-banking financial companies, insurers, brokers, investment banks, pension funds, mutual funds, trusts, exchanges and clearing houses. Whether an entity outside those categories, such as a pure technology or support-services unit, falls within regulation 3 therefore depends on its activity and its recognition by a regulator. It should not be assumed.
2. The deeming operates within FEMA. Regulation 3 treats the institution as non-resident for foreign exchange purposes. It does not change the entity’s place of incorporation, its status under the Companies Act, 2013, or its residence under tax law.
3. The counterparty is still governed by its own FEMA rules. Because an IFSC institution is non-resident for FEMA purposes, a transaction between it and a person resident in India is, from the resident’s side, generally a cross-border transaction. The resident’s permissions therefore come from the instruments that govern residents. Examples are the Liberalised Remittance Scheme for individuals and the overseas investment framework for Indian entities. They do not come from the FEMA IFSC Regulations. (Articles 12 and 13 examine these routes.)

Since 1 October 2020, section 44A of FEMA, inserted by the IFSCA Act, has provided that the RBI’s powers under FEMA do not extend to the IFSC, and are exercisable by IFSCA, “in so far as regulation of financial products, financial services and financial institutions that are permitted in the International Financial Services Centres are concerned”. IFSCA therefore now performs the RBI’s regulatory role within the IFSC. The FEMA IFSC Regulations nonetheless remain the source of the non-resident deeming.

Layer Three: An Indian Company for Corporate Law

A company incorporated in GIFT IFSC is incorporated under the Companies Act, 2013. It is subject to that Act, as modified for IFSC companies by the Ministry of Corporate Affairs’ exemption notifications (see Article 44). Its directors owe statutory duties under Indian law. Its shares are governed by Indian company law. Its winding up or insolvency falls to be considered under Indian insolvency and company law, as Article 46 explains.

The same is true of LLPs formed under the Limited Liability Partnership Act, 2008. Where a foreign bank or company operates through a branch rather than a subsidiary, the branch is not a separate legal person. The foreign entity’s obligations under Indian law, including registration requirements for foreign companies, must be considered separately.

Layer Four: Resident for Income-Tax

Under section 6(10) of the Income-tax Act, 2025, a company is resident in India in a tax year if it is an Indian company, or if its place of effective management is in India. An IFSC company incorporated in India is therefore resident for tax purposes. It is taxable on its worldwide income, subject to the IFSC-specific deductions and exemptions discussed in Articles 5 to 7.

Treaty access follows the same logic. An IFSC company that is resident in India may seek the benefit of India’s double taxation avoidance agreements as an Indian resident. The treaty and anti-abuse conditions apply to it as they would to any other Indian resident.

Why the Layering Matters: Three Illustrations

A foreign parent lends to its IFSC subsidiary. The IFSC subsidiary is a financial institution. Under FEMA it is treated as non-resident, so the loan is not an external commercial borrowing by a resident. It remains a transaction by an Indian company, however, which may engage Indian corporate-law approvals, and its interest is subject to Indian tax rules.

An Indian company pays fees to an IFSC fund manager. From the Indian company’s side, the payment is a remittance to a person resident outside India. The Indian company’s bank will look to the current-account framework. The fund manager’s own tax position is determined under the Income-tax Act, 2025 as a resident.

Goods are brought into the IFSC. For customs purposes, section 53 of the SEZ Act treats the SEZ as outside the customs territory for authorised operations. That fiction answers the customs question only. It does not decide how the importing entity is characterised under FEMA or the Companies Act.

A Note on Terminology

Market literature sometimes describes GIFT IFSC as “offshore” or a “foreign jurisdiction within India”. These phrases are convenient, but they are not legal categories. The statutes use narrower and more precise language:

The correct characterisation always depends on the statute being applied. When a contract, an opinion or a regulatory filing describes an IFSC entity, the safer drafting is to identify the specific provision under which a particular status is claimed.

Frequently Asked Questions (FAQs)

1. What is the legal status of an IFSC entity in GIFT City?

An IFSC entity may have different legal statuses under SEZ law, FEMA, company law and income-tax law, depending on the applicable statute.

2. Is a GIFT IFSC company an Indian company?

Yes. A company incorporated in India in GIFT IFSC is an Indian company under the Companies Act, 2013.

3. Is an IFSC entity treated as a non-resident under FEMA?

Qualifying financial institutions established in an IFSC are treated as persons resident outside India under Regulation 3 of the FEMA IFSC Regulations, 2015.

4. Is a GIFT IFSC company a tax resident of India?

Yes. An Indian-incorporated IFSC company is resident in India for income-tax purposes under Section 6(10) of the Income-tax Act, 2025.

5. Does GIFT IFSC qualify as foreign territory under Indian law?

No. The SEZ Act deems it outside India’s customs territory for authorised operations only. This does not make it foreign territory for all legal purposes.