Investors investing in overseas markets through GIFT City funds are experiencing significant confusion regarding tax reporting requirements. According to reports from The Economic Times and Mint, fund houses are providing conflicting guidance on whether these investments should be categorized as foreign assets. While GIFT City falls under the foreign category per FEMA regulations, it's treated as a domestic entity for income tax purposes, creating a regulatory dichotomy. The rapid growth of investment opportunities in GIFT City has opened new avenues for Indian residents to access global markets, but this blend of Indian location and global exposure has raised important tax reporting questions.
As asset manager Parag Parikh, which runs two retail outbound GIFT funds, has advised investors that holdings should be disclosed as 'foreign assets' in Income tax return (ITR). In contrast, fund house DSP, offering a global equity fund from GIFT, stated that investors are not required to disclose such investments in ITR's 'Foreign Assets Schedule' as they hold units of a fund domiciled in India. As reported by The Economic Times, DSP further clarified that since global stocks are held by the fund and not investors directly, it's the fund that would disclose them under the FA schedule in its ITR. According to Mint, many tax professionals believe that the location of the investment should be determined by the immediate asset owned by the taxpayer rather than by the fund's underlying portfolio.
At the heart of the debate lies a fundamental question: what exactly does an investor own when investing through a GIFT City fund. Under the Income-tax Act and the Black Money Act, the relevant reporting trigger is ownership of an asset "located outside India" rather than foreign exposure or overseas economic interest. As reported by Mint, in most GIFT City fund structures, the investor owns units or interests issued by a fund established in the IFSC, while the overseas shares and securities are typically held by the fund itself, not directly by the investor. This distinction supports the view that units of a GIFT City fund should not automatically be classified as foreign assets, as the immediate asset owned by the taxpayer is a unit of an IFSC fund rather than the underlying foreign securities.
Since 2012, residents have been required to disclose ownership in foreign securities, properties, and beneficial interest in offshore trusts in FA schedule in the ITR form. According to reports from The Economic Times, investments in a GIFT fund require bank transfer of foreign currency under the Reserve Bank of India's liberalised remittance scheme (LRS), which allows a resident individual to invest and spend up to $250,000 a year. The GIFT City International Financial Services Centres is classified as a 'foreign territory' under FEMA but is treated as a domestic region under the Income Tax Act. As reported by Mint, there is currently no specific clarification from the Central Board of Direct Taxes (CBDT) on Schedule FA reporting for GIFT City fund investments.
Tax professionals are divided on the appropriate reporting approach, with some advocating a more conservative stance. As reported by The Economic Times, Rajesh Gandhi from Deloitte suggested that given the regulatory dichotomy, a conservative compliance approach would be to disclose such investments in Schedule FA, particularly since the investments are reported as foreign assets by Indian entities in their RBI annual FLA return. Chartered accountant Ashish Karundia agreed with DSP's position, stating that while GIFT City is treated as foreign jurisdiction under forex regulations, it doesn't automatically apply under Income Tax Act. According to Mint, despite these arguments, uncertainty persists because there is currently no specific clarification from the CBDT. Tax experts recommend treating GIFT investments as foreign assets due to remittance requirements and TCS collection by banks, though this approach may result in increased scrutiny and different ITR filing requirements for foreign asset holders.
