When an Indian company sets up a subsidiary in GIFT City, the investment is treated as an overseas investment under India’s foreign exchange framework. The fact that GIFT City is located in Gujarat does not change this position. The transaction is governed by the Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022, and the RBI’s Overseas Investment Directions, 2022, subject to specific relaxations for investments in an International Financial Services Centre (IFSC). These relaxations can make a significant difference to Indian companies planning to establish a subsidiary in GIFT IFSC.

Two Categories, Two Consequences

The overseas investment framework distinguishes:

• Overseas Direct Investment (ODI): broadly, investment in the equity capital of a foreign entity in a manner that confers control or exceeds the portfolio threshold, together with the financial commitment that accompanies it; and
• Overseas Portfolio Investment (OPI): investment in foreign securities other than ODI, with express exclusions, including unlisted debt instruments, securities issued by a person resident in India who is not in an IFSC, derivatives unless permitted, and commodities including bullion depository receipts.

The OPI exclusion repays attention. Securities issued by a person resident in India are ordinarily outside OPI; securities issued by a person resident in India in an IFSC are not excluded. That single carve-out is what allows Indian investors to treat IFSC instruments as overseas portfolio investments.

Paragraph 24 of the Directions then makes the position explicit for funds: investment, including sponsor contribution, in the units of an investment fund or vehicle set up in an IFSC is OPI, and, in addition to listed Indian companies and resident individuals, unlisted Indian entities may make such investment. Outside the IFSC, an unlisted Indian entity’s ability to make this kind of portfolio investment is considerably narrower.

The Financial-Services Question

For Indian companies considering overseas investment in GIFT IFSC, one of the key questions is whether the parent company can invest in a financial-services entity under the applicable regulatory conditions. The RBI’s Overseas Investment Directions, 2022, read with Schedules I and V of the Overseas Investment Rules, 2022, set out the relevant requirements.

Two IFSC-specific accommodations therefore exist: a deemed approval after 45 days for regulated Indian financial entities, and relief from the three-year profitability test for other Indian companies establishing a financial-services entity in the IFSC. For a loss-making or newly profitable Indian group setting up a fund management entity or finance company in GIFT IFSC, the second is often decisive.

The Directions also clarify when a foreign entity is “engaged in financial services activity”: it is so engaged if it undertakes an activity that, if carried out in India, would require registration with or regulation by an Indian financial sector regulator. Overseas investment by banks and non-banking financial institutions regulated by the RBI remains subject to conditions stipulated by the relevant RBI department.

Structural Limits that Apply Equally to the IFSC

Several general restrictions are not relaxed for GIFT IFSC and can defeat a structure.

The two-layer rule. Under rule 19(3) of the OI Rules, financial commitment by a person resident in India in a foreign entity that has invested, or later invests, into India, directly or indirectly, resulting in a structure with more than two layers of subsidiaries is not permitted. The Directions add that no further layer may be added to a structure already having two or more layers. “Subsidiary” here carries the OI Rules meaning, which includes an entity in which the foreign entity has control, defined to include a stake of 10% or more. Round-trip structures through an IFSC holding company therefore need careful layer-counting.

Products linked to the rupee. The Directions record the restriction in rule 19(1) concerning foreign entities dealing in financial products linked to the Indian rupee, clarifying that these include non-deliverable trades involving foreign currency-INR exchange rates and stock indices linked to the Indian market. Investment is not permitted in a foreign entity engaged in such activity without specific approval.

Size threshold. Financial commitment by an Indian entity exceeding USD 1 billion (or equivalent) in a financial year requires prior RBI approval, even where the entity is otherwise within the automatic-route limit.

Credit standing. A person resident in India whose account is classified as a non-performing asset, who is a wilful defaulter, or who is under investigation by a financial sector regulator or investigative agency must obtain a no-objection certificate under rule 10 before making a financial commitment or undertaking disinvestment.

Reporting, and the Cost of Getting it Wrong

All transactions relating to ODI or financial commitment are routed through a designated authorised dealer bank and reported in Form FC. Acquisitions through rights issues are reportable; bonus shares are not treated as fresh financial commitment. Deferred consideration is treated as a non-fund-based financial commitment and reported as such, with subsequent payments reported as conversion into equity.

The 2022 framework introduced a Late Submission Fee for reporting delays. It converts what was previously a compounding exposure into a priced administrative remedy for many delays, but it does not cure a substantive breach of the Rules.

A Checklist Before Incorporating in GIFT IFSC

Before incorporating in GIFT IFSC, Indian companies should assess the applicable overseas investment rules, identify any available IFSC-specific relaxations, and plan the required approvals and reporting. The following checklist highlights key compliance points to review before making the investment or remitting funds.

1. Classify the investment. Equity in an IFSC operating entity is usually ODI; units in an IFSC fund are OPI.
2. Test the financial-services conditions, including whether the Indian parent is itself a financial services entity, and whether the IFSC target’s activity would require Indian regulatory registration if carried on in India.
3. Use the IFSC relaxations where available, including the 45-day deemed approval and the relief from the three-year profitability condition.
4. Count the layers if the IFSC entity holds, or may hold, any investment back into India.
5. Check the USD 1 billion threshold at group level for the financial year.
6. Confirm no NOC trigger exists under rule 10.
7. Calendar the Form FC filings and designate the authorised dealer bank before the first remittance.

The Regulatory Step is Separate

Compliance with the overseas investment framework permits the money to move. It does not authorise the IFSC entity’s business. The entity must still obtain its SEZ Letter of Approval and its IFSCA registration for the activity concerned (Article 3), and IFSCA’s own frameworks, such as those for finance companies or fund management entities, impose their own capital and governance conditions. In practice, the two processes run together: IFSCA’s setting-up workflow contemplates capital infusion after in-principle approval.

As at 17 September 2026, the OI Rules, Regulations and Directions described above are in force. Because the Directions are amended by circular, the current consolidated version should be checked before a transaction.

FAQ

1. Can Indian companies invest in GIFT IFSC?

Yes. Indian companies can invest in eligible GIFT IFSC entities under the Overseas Investment Rules, 2022, subject to applicable regulatory conditions and approval requirements.

2. What is the difference between ODI and OPI in GIFT IFSC?

ODI generally covers qualifying investments involving equity and control, while OPI covers eligible overseas securities that do not qualify as ODI.

3. Is RBI approval required for overseas investment in GIFT IFSC?

Not always. Certain investments may qualify under the automatic route, while specific cases require regulatory approval.

4. Can an Indian company without three years of profits invest in an IFSC financial-services entity?

Yes. The framework provides a relaxation from the three-year profitability condition for certain ODI in financial-services entities in an IFSC.

5. Is IFSCA registration sufficient to establish a GIFT IFSC entity?

No. The entity must also comply with applicable SEZ requirements and obtain the relevant Letter of Approval, where required.

6. How is overseas investment reported?

ODI and financial commitments are reported through the designated authorised dealer bank using Form FC, as applicable.

The post Indian Companies Investing in GIFT IFSC: The Overseas Investment Framework appeared first on Bhatt & Joshi Associates.

For a resident individual, GIFT IFSC presents a paradox. It is in Gujarat, but a financial institution there is treated as a person resident outside India for foreign exchange purposes (Article 2). Money moving from a resident’s savings account in Ahmedabad to an account in GIFT IFSC is therefore an outward remittance, governed by the same scheme that applies to sending money to Singapore or London: the Liberalised Remittance Scheme (LRS). What has changed, and what most commentary still gets wrong, is how wide that permission now is.

The Scheme in Outline

LRS operates under the Foreign Exchange Management Act, 1999 and is administered through the RBI’s Master Direction No. 7/2015-16, last updated on 6 September 2024. A resident individual may remit up to USD 250,000 per financial year across all permitted current and capital account transactions.

What Paragraph 11 of the Master Direction now Says

The IFSC-specific permission is in paragraph 11. Authorised persons may facilitate remittances to IFSCs in India for all permissible purposes under LRS for:

• availing financial services or financial products as per the IFSCA Act, 2019 within IFSCs; and
• all current or capital account transactions, in any other foreign jurisdiction other than IFSCs, through a foreign currency account (FCA) held in an IFSC.

Resident individuals may open an FCA in an IFSC for these purposes.

The second limb is the structurally interesting one. It makes the IFSC account a conduit: an individual may remit under LRS into an FCA in GIFT IFSC and then use that account for permitted transactions in any other foreign jurisdiction. The IFSC is not only a destination for investment; it can be the individual’s offshore banking base.

One express prohibition accompanies this: “Resident individuals shall not settle any domestic transactions with other residents through these FCAs held in IFSC.” The account is for outbound and offshore use, not for settling rupee obligations between residents.

How the Permission Widened

The current position is the product of successive liberalisation. The original 2021 permission was narrow: remittances to IFSCs were allowed for investment in IFSC securities, excluding securities issued by persons resident in India outside the IFSC, and a subsequent circular permitted payment of education fees to foreign universities or institutions in IFSCs. The RBI’s circular of 10 July 2024 replaced that narrow list with the “all permissible purposes” formulation that now appears in the Master Direction.

The practical effect is that an individual’s remittance to GIFT IFSC no longer has to be fitted into a specific enumerated purpose. It must, however, still be a purpose permissible under LRS generally. Transactions prohibited under LRS, such as those in the prohibited categories under the current account rules, remain prohibited when routed through an IFSC.

The Investment Overlay: ODI, OPI and Schedule V

Where the remittance is for investment, a second framework applies: the Foreign Exchange Management (Overseas Investment) Rules, 2022 and the RBI’s Overseas Investment Directions, 2022. Because an IFSC entity is treated as being outside India, investing in it is an overseas investment.

Paragraph 24 of the Directions deals specifically with investment in an IFSC by a person resident in India, and applies Schedule V of the OI Rules. Two points are significant for individuals.

Units of IFSC funds are overseas portfolio investment. Investment, including sponsor contribution, in the units of an investment fund or vehicle set up in an IFSC is treated as OPI. For resident individuals, OPI is made within the overall LRS limit. An investment in a GIFT IFSC fund therefore consumes LRS headroom in the same way as any other overseas investment.

Restrictions that apply elsewhere are relaxed for the IFSC. The Directions state that the restriction confining a resident individual’s overseas direct investment to an operating foreign entity, and the restriction against ODI in a foreign entity engaged in financial services activity, do not apply to an investment in an IFSC. The relaxation has express limits: the investment may not be made in a foreign entity engaged in banking or insurance. An IFSC entity in which a resident individual invests may have a subsidiary or step-down subsidiary in the IFSC, and may have one outside the IFSC where the resident individual does not have control. An individual who has made ODI without control may not later acquire control in an entity that has since set up or acquired a subsidiary outside India.

There is, in short, a genuinely wider door into GIFT IFSC than into other overseas jurisdictions for individuals, provided the entity is not a bank or insurer and the control conditions are respected.

Tax Collected at Source: A Cash-Flow Point, Not a Cost

Remittances under LRS attract tax collected at source. Under section 394(1) of the Income-tax Act, 2025 (Table, Sl. No. 7), TCS applies to LRS remittances where the amount or aggregate exceeds ₹10 lakh in a year, at 5% where the purpose is education or medical treatment and 20% for other purposes. The Finance Act, 2026 reduced the education and medical rate to 2% with effect from 1 April 2026.

TCS is collected by the authorised dealer and is creditable against the remitter’s income-tax liability. It is a timing cost rather than a permanent one, but for a large investment remittance the 20% rate is a material cash-flow consideration, and it applies to remittances into GIFT IFSC just as to any other LRS remittance.

A Practical Sequence

1. Confirm the purpose is permissible under LRS. The 2024 widening did not create new categories of permitted transaction; it removed the IFSC-specific narrowing.
2. Open the FCA with an IFSC Banking Unit if the funds are to be held or deployed offshore, and note that the account cannot be used to settle transactions with other residents.
3. Classify the investment. Units of an IFSC fund are OPI; equity in an IFSC operating entity may be ODI. The classification determines the reporting obligations under the OI framework.
4. Check the banking and insurance exclusion before investing in an IFSC entity as an individual.
5. Budget for TCS on remittances above the ₹10 lakh threshold and retain evidence for credit.
6. Track the annual limit across all LRS uses, since investment, travel, education and maintenance of relatives draw on the same USD 250,000.

What this Does Not Change

Remitting under LRS does not alter the tax residence of the individual, and income earned on IFSC investments remains taxable in India in the resident’s hands under the ordinary rules. The Schedule VI exemptions discussed in Article 7 are, by their terms, directed at non-residents and specified funds, not at resident individual investors. Nor does the LRS route displace the obligation of the IFSC entity to comply with its own KYC and AML requirements (Article 35).

As at 17 September 2026, the framework described above is in force. Because the LRS and overseas investment positions are set by RBI instruments that are amended by circular, the Master Direction and the Directions should be checked in their current updated form before a remittance.

Frequently Asked Questions

1. What is the LRS limit for investing in GIFT IFSC?

Resident individuals may remit up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS), subject to applicable RBI rules.

2. Can resident Indians open a foreign currency account in GIFT IFSC?

Yes. Resident individuals may open a foreign currency account (FCA) in an IFSC for purposes permitted under paragraph 11 of the RBI Master Direction.

3. Can residents invest in GIFT IFSC funds under LRS?

Yes. Investment in units of an investment fund or vehicle set up in an IFSC is treated as overseas portfolio investment (OPI) and counts towards the LRS limit.

4. Is TCS applicable to LRS remittances to GIFT IFSC?

Yes. TCS generally applies to qualifying LRS remittances exceeding ₹10 lakh in a financial year, at the rate applicable to the purpose of the remittance.

5. Can an IFSC foreign currency account be used for domestic transactions?

No. Resident individuals cannot use these accounts to settle domestic transactions with other residents.

The post Resident Individuals and GIFT IFSC: What the Liberalised Remittance Scheme (LRS) Now Permits appeared first on Bhatt & Joshi Associates.