Relocating an Offshore Fund to GIFT IFSC : The Tax-Neutrality Conditions

Moving a fund is not like moving an office. The relocation of offshore funds to GIFT City can involve two potential capital gains tax events: the fund’s transfer of assets to a new vehicle in GIFT IFSC and each investor’s exchange of interests in the original fund for interests in the new one. The Income-tax Act, 2025 provides tax neutrality for qualifying relocations, subject to specific statutory conditions and a prescribed deadline.

Section 70 of the Income-tax Act, 2025 identifies transactions that are not regarded as transfers for capital gains purposes. Two clauses specifically address the tax treatment of fund relocation:

• Section 70(1)(t): The transfer of a capital asset by the original fund to the resultant fund as part of a relocation.
• Section 70(1)(u): The transfer by a shareholder, unit holder or interest holder of shares, units or interests in the original fund in exchange for shares, units or interests in the resultant fund.

Together, these provisions cover both the fund-level transfer of assets and the investor-level exchange of interests. If either limb fails to qualify, the intended tax neutrality may not apply to that part of the transaction, with different consequences for the fund and its investors.

The Three Defined Terms that Do the Work

Section 70(2) (Table, Sl. No. 5) defines the key terms that determine whether an offshore fund relocation to GIFT IFSC qualifies for tax neutrality.

“Original fund” means, in substance, a fund established, incorporated or registered outside India that collects funds from members for investment on their behalf and satisfies four conditions: it is not a person resident in India; it is a resident of a country or specified territory with which India has an agreement under section 159(1) or (2), or is established in a country or territory notified by the Central Government; the fund and its activities are subject to applicable investor-protection regulation in that country; and it fulfils such other conditions as may be prescribed. The definition also covers an investment vehicle wholly owned and controlled directly or indirectly by the Abu Dhabi Investment Authority or the Government of Abu Dhabi, and any fund notified by the Central Government subject to specified conditions.

“Relocation” means the transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund on or before 31 March 2030, where the consideration is discharged in the form of shares, units or interests in the resulting fund issued either to the holders of the original fund in the same proportion as their existing holdings, or to the original fund itself in the same proportion where no issue is made to holders.

“Resultant fund” means a fund established or incorporated in India as a trust, company or LLP, located in an IFSC, which has been granted either a certificate of registration as a Category I, II or III Alternative Investment Fund, or a certificate as a retail scheme or Exchange Traded Fund under Schedule VI (Note 1) satisfying the conditions in Schedule VI, and which is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the IFSCA Fund Management Regulations.

Three practical points follow. First, the deadline is a hard date: a relocation completed after 31 March 2030 is outside the definition. Second, proportionality is essential; the consideration must mirror existing holdings. Third, the resultant fund must already hold, or obtain, the correct IFSCA authorisation. The regulatory step is a condition of the tax outcome, not a parallel workstream.

What Follows from Neutrality

Because the relocation transfers are not regarded as transfers, three further consequences arise under the Act.

• Cost carries over. For assets and interests acquired through a transfer referred to in section 70(1)(t) or (u), the cost of acquisition is the cost to the previous owner, computed under the Act’s special provisions for such transactions. Neutrality defers the gain; it does not erase it.
• No charge as a receipt without consideration. The Act’s charge on receipt of property without, or for inadequate, consideration expressly excludes receipts by way of a transaction not regarded as a transfer under section 70(1)(t) and (u). Without this, the investor’s receipt of new units could have been taxed as a gratuitous receipt.
• Losses survive a change in shareholding. The Act’s restriction on carry-forward of losses where there is a change in shareholding does not apply to a company to the extent the change takes place on account of relocation referred to in section 70(2) (Table: Sl. No. 5.C).

After Relocation: The Built-in Indian Gains

Neutrality at the point of relocation would be of limited use if the resultant fund then paid Indian tax on gains that the original fund would not have paid. Schedule VI (Table, Sl. No. 10) addresses this. Capital gains on the transfer of shares of a company resident in India are excluded from total income of a non-resident or a specified fund, where:

• the gains arise on a transfer by the resultant fund or a specified fund;
• the shares were transferred from the original fund, or its wholly owned special purpose vehicle, to the resultant fund in relocation, and the gains on those shares would not have been chargeable to tax had the relocation not taken place; and
• the exclusion is limited to the extent attributable to units held by non-residents that are not permanent establishments of a non-resident in India, computed in the prescribed manner.

The second condition is the analytical heart of the provision. It preserves the pre-relocation position rather than improving it. Where the original fund would have been taxable in India on a gain, for example because no treaty relief was available, the resultant fund does not acquire an exemption by relocating. Testing this counterfactual, asset by asset, is the central diligence exercise in a relocation.

Sequencing the Transaction

A relocation of an offshore fund to GIFT IFSC generally involves the following steps:

1. Confirm the original fund qualifies, including the treaty or notified-jurisdiction condition and investor-protection regulation in its home jurisdiction.
2. Establish and authorise the resultant fund in GIFT IFSC under the IFSCA Fund Management Regulations, with the correct category of registration or scheme certificate (see Articles 18 and 19).
3. Structure the consideration so that shares, units or interests are issued in the same proportion, satisfying the definition of relocation.
4. Run the counterfactual analysis on the Indian-share portfolio for Schedule VI (Sl. No. 10).
5. Complete the transfer on or before 31 March 2030.
6. Maintain the non-resident unit-holding position, since both Schedule VI and section 210 apply attribution rules based on units held by non-residents.

Points of Continuing Uncertainty

Several conditions in these provisions are “as may be prescribed”, including conditions for the original fund and the manner of computing attributable income. Claims should be tested against the rules in force for the relevant tax year. Under the 1961 Act, the corresponding provision was section 47(viiab) and related clauses, and notifications issued under that Act, for example the notification dated 12 September 2023 concerning investment trusts, schemes and ETFs, continue to be relevant so far as they are consistent with the 2025 Act. As at 17 September 2026, no judicial decision interpreting the relocation provisions of the 2025 Act was traced.

Finally, tax neutrality does not address the non-tax dimensions of a relocation: investor consents, the treatment of existing contracts, the regulatory position of the original fund in its home jurisdiction, and the foreign-exchange and reporting consequences of the transfer. Those sit outside the Income-tax Act and must be run in parallel.

FAQs

1. What is tax-neutral relocation of an offshore fund to GIFT IFSC?

It allows qualifying transfers of fund assets and investor interests without treating them as transfers for capital gains purposes under section 70.

2. What is the deadline for tax-neutral fund relocation?

The relocation must be completed on or before 31 March 2030.

3. Which funds qualify for relocation tax neutrality?

The original fund must meet the statutory eligibility conditions, and the resultant fund must satisfy the prescribed IFSC location and regulatory authorisation requirements.

4. Does relocation eliminate future capital gains tax?

No. Tax neutrality generally defers capital gains at relocation. Subsequent gains remain subject to applicable tax rules, although Schedule VI provides a limited exclusion for qualifying Indian-share gains.

5. Why is proportional consideration important?

The shares, units or interests issued as consideration must satisfy the statutory proportionality requirements for the transaction to qualify as a relocation.