We will soon be inundated with offers to invest in Gift City (Gujarat International Financial-Tec City) for affluent Indian residents and NRIs. I have been spending a little time reading up on the feature, and these are my initial impressions. I will share my other learnings over time.
Caveat lector: I am not an expert on the subject, especially about taxation. So please do your research.
In simple terms, Gift City is an offshore investment destination located in India. One could invest in both international stocks, bonds, and other assets directly in USD or other currencies, rather than in INR.
There are two types of products – inbound for NRIs and outbound for resident Indians.
There seem to be significant benefits for NRIs, both in terms of account opening (which may not be entirely online as of now) and taxation (depending on the country of residence).
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For NRIs, this removes currency depreciation risk as they do not have to invest in India in INR. There are also numerous tax benefits, but these vary depending on the country of residence.
For resident Indians, the tax benefits are not compelling. The primary attraction appears to be investing in international equity without being constrained by RBI limits on domestic funds.
The biggest catch is that the taxation is at the fund level and not at the investor level. Whenever the fund churns, they will have to pay tax at the applicable rate. This rate, as per my understanding, should change from investor to investor as per their country of residence. Readers are requested to contact us if they think any aspect of this article requires correction. We shall be happy to update the article with due credit.
This means the fund will pay the tax if it buys and sells securities. The taxation rule could force fund managers to minimise churn.
If you are a resident Indian or an NRI from a country where capital gains are taxed, then choose passive products like a fund of funds with an underlying index fund where the churn is minimal.
I think the biggest beneficiaries would be NRIs from countries with no income tax or no capital gains tax. Then the same will apply to the Gift City investments. However, they too should avoid fancy PMS products.
For investors from the USA, the situation is far more complex in terms of taxation. They will have to account for unrealised gains, declare them, and pay balance tax as per the double taxation agreement, among other obligations. It is advisable to wait for a period before tax experts in India or the USA become familiar with these laws.
I am compiling a table to compare tax benefits for RIs and NRIs, but the whole scenario is complex and I need more time.
In summary, my initial impressions suggest that investing via GIFT city is a good idea for individuals with no income or capital gains tax in their country of residence. But they should avoid exotic alternative investments and wait for low-cost passive products that invest in listed Indian equity.
For other NRIs, it is better to wait for absolute tax clarity. Resident Indians, who can afford the ticket size, should also prefer low-cost passive options.
Also read by SEBI RIA Abhishek Kumar, DSP Global Equity Fund: Should you invest in this retail offshore MF from GIFT City?
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