In Part 4, we explored whether a GIFT City PMS can invest in Indian stocks under the FEMA and LRS framework; in this Part, we will understand GIFT City PMS taxation.

The GIFT City PMS taxation framework operates at three distinct levels:

• The FME entity level — the IFSC branch of the foreign investment adviser, which receives management fees and performance fees
• The account / fund level — the separately managed PMS account itself
• The investor level — the Indian resident (or non-resident) individual whose funds are under management

Importantly, understanding the taxation of GIFT City PMS at each level is necessary, because the tax benefit that makes the GIFT City PMS structurally attractive — the 20-year income tax holiday under Section 147 of the Income Tax Act, 2025 — operates at the FME entity level, not at the investor level. Accordingly, at the investor level, ordinary capital gains rules apply, and the pass-through issues that arise in pooled fund structures do not arise for PMS separately managed accounts.

Key question this article answers: What are the tax consequences of GIFT City PMS taxation — for the FME, for the PMS account, and for the Indian resident investor — and what does the Section 147 holiday actually cover?

Entity-Level GIFT City PMS Taxation — The Section 147 IFSC Holiday

The Legislative Background

Section 147 of the Income Tax Act, 2025 — effective 1 April 2026 — is the successor to Section 80LA of the Income Tax Act, 1961. The two provisions serve the same function: conferring a tax holiday on units operating within a Special Economic Zone designated as an International Financial Services Centre. Importantly, Section 147 materially enhances the benefit available under the predecessor regime.

What the Section 147 Holiday Covers

Section 147 grants a 100% deduction on business income of an IFSC unit for 20 consecutive assessment years chosen out of a 25-year block commencing with the year in which the requisite permissions were obtained (i.e., the year of IFSCA registration).

Specifically, for an IFSC FME offering discretionary PMS, the business income that qualifies for the deduction includes:

• Management fees — charged to clients as a percentage of assets under management
• Performance fees — charged to clients as a percentage of returns above a benchmark or high-water mark

Accordingly, both categories, when received by the IFSC FME from its PMS clients, are business income of the IFSC unit and are eligible for the Section 147 holiday.

What the Section 147 Holiday Does Not Cover

However, the holiday applies to the FME’s business income, not to the investment returns earned by clients. Indian-source capital gains on Indian securities — if any were held in the PMS account — remain subject to Indian domestic capital gains tax at the investor level. Therefore, the holiday does not shield the investor’s capital gains; instead, it shields the FME’s fee income.

In practice, for an outbound-only GIFT City PMS (as recommended in Part 4 of this series), this distinction matters less in practice: the FME’s fee income from managing global portfolios benefits from the full holiday; the client’s capital gains on foreign securities are taxed at ordinary offshore capital gains rates at the investor level.

The Additional Tax Benefits for IFSC Units

Beyond the Section 147 income tax holiday, IFSC units benefit from several additional tax and fiscal concessions:

The Section 147(5) Anti-Abuse Rule

Section 147(5) provides that, for units commencing on or after 1 April 2026, the deduction is available only if the unit is not formed by the splitting up, reconstruction, reorganisation, or transfer of a business already in existence in India. Therefore, the anti-abuse rule is designed to prevent the relocation of existing onshore operations into the IFSC to capture the tax holiday.

For a foreign investment adviser establishing a fresh GIFT City branch, this rule is ordinarily not a concern — the branch is a new presence in India, not a reconstituted onshore entity. However, diligence at the time of IFSCA registration should verify that:

• The branch does not incorporate assets transferred from an existing Indian operation of the parent group
• The staffing of the branch does not consist of personnel previously employed by an Indian onshore entity of the same group
• The client relationships managed by the branch were not previously managed by a SEBI-registered Indian affiliate

Where any of these conditions is potentially present, the position under Section 147(5) should be specifically reviewed.

Carried Interest — A Note on Characterisation for PMS Structures

For a PMS separately managed account, the conventional fee structure is a management fee (percentage of AUM) and a performance fee (percentage of returns above a benchmark or high-water mark). Importantly, both, when received by the IFSC FME, qualify as business income and are eligible for the Section 147 holiday.

However, a separate question arises if the FME structures carried interest as a return on co-investment units rather than as a performance fee. Where carried interest is structured as a return on capital, the character of the income for tax purposes may shift from business income (eligible for the Section 147 holiday) to capital gains — potentially attracting the 12.5% long-term capital gains rate rather than the full business income deduction.

In practice, the characterisation is fact-specific and turns on the terms of the co-investment arrangement and the substantive economic structure. For a pure PMS structure — separately managed accounts with management fees and performance fees — this question does not generally arise. It is relevant primarily to fund structures where carried interest is structured as a differential-rights instrument.

Investor-Level GIFT City PMS Taxation — How Indian Residents Are Taxed

The PMS Account Is Not a Pooled Vehicle

The most important preliminary point on investor-level GIFT City PMS taxation is structural: a PMS separately managed account is not a pooled fund. The account is owned by the individual investor. The securities in the account are legally the investor’s assets (held through the FME under a power of attorney or equivalent arrangement). The income earned in the account is the investor’s income from the outset.

Accordingly, the pass-through framework under Section 115UB of the Income Tax Act — which applies to Category I and Category II AIFs, and to equivalent IFSC fund structures — does not apply to PMS accounts. There is no intermediate pooled entity whose tax status needs to be passed through to investors. The investor is directly taxed on the returns in the account as if the investments had been held directly.

Capital Gains on Foreign Securities Held in a GIFT City PMS

For an Indian resident individual holding foreign securities through a GIFT City PMS account, the capital gains treatment follows the ordinary offshore capital gains framework applicable to Indian residents:

Long-term capital gains (holding period: more than 24 months)

Following the rationalisation introduced by the Finance (No. 2) Act, 2024:

• Long-term capital gains on listed foreign securities held for more than 24 months: 12.5% (plus applicable surcharge and cess)
• This rate applies uniformly — the indexation benefit is not available for foreign securities

Short-term capital gains (holding period: 24 months or less)

• Taxed at the investor’s applicable income tax slab rate — up to 30% (plus surcharge and cess)

Dividend income

• Taxed at the investor’s applicable slab rate
• Credit is available for any foreign tax withheld on dividends under the applicable Double Taxation Avoidance Agreement — see Part 3 below

The 24-Month Holding Period — A Key Planning Consideration

Importantly, for global equity strategies managed with moderate portfolio turnover, many positions will be held for more than 24 months, qualifying for the 12.5% long-term rate. However, for more actively managed strategies, the investor should anticipate that a portion of realised gains each year will be short-term and taxed at slab rates. Accordingly, the FME’s portfolio management agreement should address reporting obligations to enable accurate tax computation.

Comparison with Domestic SEBI PMS Capital Gains Treatment

DTAA in GIFT City PMS Taxation — Foreign Tax Credit Framework

The Role of the DTAA in a GIFT City PMS

Examples

• US-source dividends: The India-US DTAA limits withholding at source to 15% (or 25% in certain cases). The Indian investor can claim a foreign tax credit against Indian tax liability for the US withholding, to the extent of Indian tax payable on the same income.
• UK-source dividends: The India-UK DTAA provides similar credit mechanisms.
• Multiple-jurisdiction portfolios: A globally diversified GIFT City PMS may generate dividend income from securities in 20 or more jurisdictions. The investor’s Indian tax return must include foreign tax credit claims for withholding in each relevant jurisdiction, supported by evidence of foreign tax paid.

The Bombay High Court in Colorcon — DTAA Rates Prevail

n Colorcon Asia Pvt. Ltd. v. Joint Commissioner of Income Tax (Tax Appeal No. 5 of 2024, Bombay High Court, Goa Bench, decided 28 November 2025, Dangre and Mehta JJ.; citation 2025 TAXSCAN (HC) 2628), the Court applied Section 90(2) of the Income Tax Act to hold that DTAA rates prevail over domestic rates where more beneficial — specifically, that the rate on dividends paid to a UK parent could not exceed the India-UK treaty rate.

The principle is well-established in Indian tax law and is an important anchor for GIFT City PMS taxation: where a DTAA rate is more favourable than the domestic withholding or tax rate, the treaty rate applies. Investors in a GIFT City PMS should ensure that their advisers are familiar with the DTAA provisions applicable to each jurisdiction from which the portfolio generates income.

A Practical Note on Foreign Tax Credit Claims

Foreign tax credit claims in India require careful compliance:

• Form 67 must be filed before the due date
• Evidence of foreign tax paid must be maintained
• Credit is limited to Indian tax payable
• Excess credit cannot be carried forward

Accordingly, coordinated reporting between the IFSC FME and the investor is essential.

Taxation of Non-Resident Investors in GIFT City PMS

While the primary focus remains on Indian residents, the structure is also accessible to NRIs, OCIs, and other non-residents.

Key points:

• FME fee income qualifies for the Section 147 holiday
• Capital gains are generally not taxable in India
• Dividend taxation depends on source and treaty
• DTAA determines final treatment

GIFT City PMS Taxation Summary

Frequently Asked Questions (FAQs)

Is GIFT City PMS taxation tax-free?

No. Only the IFSC entity benefits from the Section 147 tax holiday.

What is the capital gains tax?

Long-term: 12.5%
Short-term: Slab rate

Does DTAA apply?

Yes, foreign tax credits apply.

Is TCS applicable?

Yes, 20% under LRS (adjustable).

Is it better than SEBI PMS?

It depends on strategy and holding period.

The post GIFT City PMS Taxation (2026): Section 147 IFSC Holiday, Capital Gains & DTAA – Complete Guide appeared first on Bhatt & Joshi Associates.