GIFT City Category III AIF: Structure, Currency and Tax Rules

Most explainers treat every fund in GIFT City as one product with one tax answer. That is where investors get hurt. A GIFT City Category III AIF sits under a different regulator from its onshore cousin, counts its money in dollars, and is taxed under provisions that were renumbered when the Income-tax Act, 2025 took effect on 1 April 2026.

Three questions decide whether the vehicle suits you. What is it legally, and what can the manager do with your money? Which currency do you hold, and which currency do you really bear? And who pays tax, at what rate, on which kind of income?

This guide answers those three questions from the regulations and the statute as they stand on 7 October 2026. It is written for NRIs and OCIs, foreign investors, and resident Indians who can remit under the Liberalised Remittance Scheme (LRS). It is general information, not tax or investment advice. Confirm your own position with a qualified adviser before you invest.

The idea behind an International Financial Services Centre (IFSC) is simple: a zone on Indian soil that is treated as offshore for exchange control. The Reserve Bank of India wrote that into law on 2 March 2015. Under its FEMA regulations for the IFSC, a financial institution set up there "shall be treated as a person resident outside India" and conducts business in foreign currency as its regulator decides.

The milestones since then explain today's rules:

• 2019: Parliament passes the IFSCA Act, creating one regulator for the centre. Before it, RBI, SEBI, PFRDA and IRDAI each regulated their own slice.
• April 2022: the first IFSCA (Fund Management) Regulations are notified.
• May–June 2024: IFSCA and SEBI open a route for IFSC funds to take up to 100% NRI and OCI money into Indian listed securities.
• July 2024: RBI widens LRS so residents can remit to an IFSC for any IFSC financial product.
• February 2025: the IFSCA (Fund Management) Regulations, 2025 replace the 2022 text and cut the minimum scheme corpus from USD 5 million to USD 3 million.
• August 2025: the Income-tax Act, 2025 receives assent and moves the fund exemptions into a new Schedule VI.
• January and September 2026: two amendment regulations refine corpus timing, custody, NAV disclosure and the manager's own contribution. The consolidated text now reads "as amended up to September 10, 2026".

Scale has followed. IFSCA's fund brochure shows cumulative commitments of USD 32.13 billion and 6,721 investors across IFSC funds at December 2025. Law firm AZB & Partners puts Category III strategies at USD 13.50 billion of the USD 26.3 billion committed by September 2025, about half of the total.

IFSCA does not register each fund the way SEBI registers an onshore AIF. It registers the manager, called a fund management entity (FME), and the manager then files schemes. The scheme type that matters here is the restricted scheme, which the regulations also label a non-retail scheme.

A restricted scheme is offered by private placement only to accredited investors or to investors putting in at least USD 150,000, and it cannot have more than 1,000 investors. When such a scheme is meant for "diverse or complex trading strategies including investment in listed or unlisted derivatives", it is filed as a Category III Alternative Investment Fund. The regulation adds that it may be treated as a Category III AIF for the Income-tax Act and FEMA. That one line is the bridge between IFSCA's vocabulary and the tax law. In practice, "IFSC Category III AIF" and "Category III restricted scheme" describe the same thing.

Only a Registered FME can launch a restricted scheme. A Registered FME (Non-Retail) needs a minimum net worth of USD 500,000, a principal officer and a separate compliance officer, both based in the IFSC. Filing runs through a green channel: the scheme can open for subscription once IFSCA confirms that the placement memorandum is taken on record. For income-tax purposes, that confirmation counts as the certificate of registration.

The GIFT City AIF minimum investment is USD 150,000 per investor, with three exceptions written into the regulation:

• Accredited investors have no minimum.
• Employees, directors and designated partners of the FME can invest from USD 40,000.
• Two close relatives (spouse, parent, or child) investing jointly can meet the USD 150,000 together.

The scheme itself must reach a corpus of USD 3 million. An open-ended scheme may start investing at USD 1 million and has 12 months to reach the full amount. The vehicle can be a company, an LLP or a trust formed under Indian law.

Onshore, SEBI's master circular says the leverage of a Category III AIF "shall not exceed 2 times of the NAV of the fund". The IFSC rule works differently. A restricted scheme "may borrow funds or engage in leveraging activities" on three conditions: the maximum leverage and the method of calculating it are disclosed in the placement memorandum; any deviation needs consent of two-thirds of investors by value; and the FME runs a risk management framework suited to the fund's size and complexity.

So the regulation sets no number. The placement memorandum does. You will only know the limit by reading that document.

A Category III scheme may be open-ended or close-ended. Open-ended schemes must compute and disclose NAV at least monthly, close-ended ones at least half-yearly, and all must disclose the portfolio quarterly. Assets are valued by an independent provider such as a fund administrator or custodian. An independent custodian is mandatory for every open-ended restricted scheme and for other schemes above USD 70 million.

The manager also has to invest alongside you. Since 10 September 2026, the FME or its associate must contribute at least 2.5% of the corpus or USD 750,000, whichever is lower, in a close-ended scheme, and 5% or USD 1.5 million, whichever is lower, in an open-ended one. The contribution can be waived, for example where two-thirds of investors by value agree or two-thirds of the investors are accredited, so check whether your scheme has used a waiver.

Every threshold in the fund regulations is written in US dollars, and the FEMA rule for the IFSC has institutions there doing business in foreign currency. For you as an investor, that means you subscribe in dollars (or another foreign currency the scheme accepts), the NAV is struck in that currency, and redemptions come back in it. There is no rupee conversion at your level.

What the fund buys is a separate matter. A restricted scheme may invest in the IFSC, in India or in foreign jurisdictions. An "inbound" Category III AIF in GIFT City converts dollars to rupees and buys Indian shares and derivatives, usually after registering as a foreign portfolio investor. An "outbound" scheme keeps the money in global assets.

A dollar unit of an India-focused fund is still a rupee asset underneath. If Indian shares rise 10% in rupees and the rupee falls 4% against the dollar, your dollar NAV rises by roughly 5.6%, before fees and tax. The unit currency changes how the result is reported, not what you are exposed to.

The regulations do not require a scheme to hedge. Tools exist: rupee-dollar futures and options have traded on both IFSC exchanges, India INX and NSE IFSC, since 8 May 2020, settled in dollars. Whether your fund uses them, and what hedging costs it, is a question for the placement memorandum and the manager.

The regulation's test is about ticket size and accreditation, not passport. In practice three groups invest.

NRIs and OCIs. They invest with foreign-currency funds, outside the LRS framework. A 2024 change matters here: IFSC-based funds registered as FPIs may now take up to 100% of their corpus from NRIs, OCIs and resident Indian individuals. IFSCA's FAQs contrast that with funds in other foreign jurisdictions, which cannot take more than 50% from NRIs and OCIs. The fund either files PAN copies of those investors with its depository participant, or stays a single pool with at least 20 investors, none above 25% of the corpus. That is why a GIFT City AIF for NRI investors can be built almost entirely from diaspora money.

Foreign investors. Foreign individuals, family offices and institutions invest on the same terms, subject to the scheme's own KYC.

Resident Indians. RBI's overseas investment directions let a resident individual invest in units of an IFSC investment fund as overseas portfolio investment, inside the LRS limit of USD 250,000 a financial year. LRS is only for residents; NRIs do not use it. Residents are already a large group: IFSCA's December 2025 data shows individual investors in IFSC funds split 51% NRI/OCI and 45% resident. For residents, remittances for investment above Rs 10 lakh in a year also attract 20% tax collected at source. As the tax sections show, a resident's presence also changes how the scheme itself is taxed.

A Category III AIF gets no pass-through, onshore or in the IFSC. The pass-through section of the Income-tax Act, 2025 (published in the Gazette of India on 21 August 2025) covers only Category I and II funds. So the fund is the taxpayer, and the question is how much of its income is exempt.

The Income-tax Act, 2025 applies from 1 April 2026. Most documents you will be shown still quote the 1961 Act, so keep both sets of numbers in view.

The Finance Bill 2026 memorandum confirms the 10(4D), 115AD and 80LA mappings. The others are matched here by the content of the provisions.

Everything depends on the scheme being a specified fund. Under Note 1(g) of Schedule VI, as aligned by the Finance Act, 2026, that means an IFSC fund registered as a Category III AIF in which all units, other than those held by the sponsor or manager, are held by non-residents. A narrow tolerance exists where a unit holder who was non-resident at entry later becomes resident, provided such holders stay within 5% of total units.

For a specified fund, income is exempt to the extent it is attributable to units held by non-residents:

Two points get lost in sales material. First, GIFT City AIF taxation is not "nil": a long-only Indian equity book pays capital gains tax at the fund at the same headline rates as anyone else. Second, the exemption is strongest for strategies that live in derivatives, debt or foreign assets, which is what Category III funds were designed to run.

The 10% tax on a specified fund's interest and dividends carries no surcharge, and IFSCA's brochure adds that cess does not apply either where the fund is a trust. On capital gains, surcharge is capped at 15%, and the 4% cess applies. A specified fund is also outside alternate minimum tax.

Securities transaction tax, commodities transaction tax and stamp duty are shown by IFSCA as 0% for trades on IFSC exchanges, and fund management services to an IFSC fund are outside GST. When the fund trades on NSE or BSE as an FPI, it pays STT like any other participant. From 1 April 2026 that is 0.05% on futures and 0.15% on options.

For a non-resident in a specified fund, the investor-level rule is one line long. Schedule VI, Sl. No. 9 exempts "any income accruing or arising to, or received from a specified fund or on transfer of units in a specified fund", and the conditions column says "Nil". Distributions and redemption gains are not taxed again in India. IFSCA also notes that non-resident investors are exempt from obtaining a PAN and filing an Indian return, subject to conditions.

India's exemption does not bind your country of residence. A resident of a country with no personal income tax may have nothing more to pay; a US or UK resident will usually have to report and may be taxed at home. US persons also face the passive foreign investment company rules, which can be costly for pooled funds.

Now the resident. The definition requires all units to be held by non-residents. A scheme that admits resident investors through LRS remittances to the IFSC is therefore not a specified fund. The Schedule VI exemptions, the 10% rate, the surcharge relief and the unit-holder exemption are all tied to that label. Without it, tax publisher Taxmann describes the fund's income as taxed in the hands of the trustee as a representative assessee, and law firm ATB Legal puts it plainly: a resident investor "is taxed under the ordinary rules".

This is why a manager may offer one scheme for non-residents and another for residents rather than mixing them. If you are resident, ask how the scheme you are offered is taxed, and get the answer in writing. If you are non-resident, ask who else is in the pool. The exact outcome for a mixed or resident-only scheme depends on the trust deed and the facts, and this is the area where professional advice matters most.

The table below is an illustration, not a forecast. It assumes 100 of pre-tax gain of each type earned by a fund, the highest surcharge tier, and a specified fund whose income is wholly attributable to non-resident units. It ignores fees, STT, the Rs 1.25 lakh threshold on listed equity gains, treaty relief and any tax in your country of residence.

The lesson is narrower than the marketing. On plain share gains the two structures are level at the fund. The gap opens on derivatives and other non-share securities. Which onshore surcharge applies is itself a point advisers treat differently, and onshore Category III tax is a subject of its own.

Investors often hear that GIFT City tax breaks "end in 2030". The picture is more specific.

The Category III limb of the specified fund definition carries no commencement deadline in Schedule VI. The date in that note applies to a different kind of specified fund, the investment division of an offshore banking unit, which must commence operations by 31 March 2030. That date was 31 March 2025 before Budget 2025 extended it under the 1961 Act, and the Finance Act, 2026 carried the 2030 date into the 2025 Act.

Budget 2025 also moved other IFSC dates to 31 March 2030, including the window for tax-neutral relocation of offshore funds and the safe harbour for IFSC fund managers.

For the manager, the Finance Act, 2026 lengthened the IFSC unit deduction from 10 consecutive years out of 15 to 20 consecutive years out of 25, with business income taxed at 15% afterwards, from tax year 2026-27. That affects the FME's economics, not your units directly. None of this prevents Parliament from changing the rules in a future Finance Act.

The category exists for trading-led strategies: long-short equity, arbitrage and derivative-based approaches on India, alongside fund-of-funds feeders and global strategies. AZB & Partners counted 194 FMEs and 310 schemes at September 2025.

Much of the plumbing is digital. Third-party fund management lets an authorised IFSC platform host a restricted scheme for a manager with no office in GIFT City, up to USD 50 million a scheme. Inbound funds hold Indian securities through the FPI and depository system, where the 2024 route relies on PAN-level reporting of each NRI, OCI and resident constituent.

1. Tax follows the asset. For a specified fund, gains on derivatives, debt and foreign securities are exempt at the fund, and income from Indian interest and dividends is taxed at a flat 10% without surcharge.
2. One layer of Indian tax. Unit holders of a specified fund are exempt on distributions and on transfer of units.
3. Flexible leverage. The limit is what the placement memorandum discloses, not a regulatory 2 times NAV.
4. Foreign-currency reporting and repatriation. You invest, track and redeem in dollars, through a vehicle that FEMA treats as non-resident.
5. A full-diaspora pool. An IFSC fund can take up to 100% NRI and OCI money into Indian listed securities.

For an NRI, the onshore route means rupee accounts and rupee NAVs. A GIFT City Category III AIF replaces that with one subscription in dollars, one NAV, and tax settled inside the fund. Where the scheme is a specified fund, there is no Indian capital gains computation at your level and, subject to conditions, no PAN or Indian return on account of this investment.

For a resident, an outbound restricted scheme offers a regulated Indian wrapper around global assets within LRS.

PMS Sahi Hai describes itself as India's first AI-powered PMS and AIF marketplace, and its research layer, Nyra, as an AI-powered research platform for PMS, AIF and GIFT City. Neither replaces a placement memorandum. What they can do is shorten the path to the right questions.

Start with the route. The site's GIFT City hub sets out the dollars-in, dollars-out idea for NRIs at a product level. For the rulebook behind it, three published explainers go deeper than this article on their own ground: what IFSCA is, the older section 10(4D) fund exemption, and the section 10(4E) relief for non-residents. The AIF categories guide gives the onshore Category III picture.

Then compare like with like. The compare tool has filters for PMS, AIF and GIFT City funds and lets you shortlist up to four strategies side by side. Nyra's methodology page explains the 0–10 score behind it: five pillars, from return performance (30%) to structure and stewardship (10%), built on 17 metrics per strategy.

Know where the score stops. The same page says a Nyra score is "not a prediction", "not a recommendation" and "not like-for-like across asset classes", and the site describes Nyra as an analytical tool, not a SEBI-registered investment adviser. A score will not tell you whether a scheme is a specified fund, how much leverage its memorandum permits, or whether it hedges the rupee. Those are the inner clauses, and they come from the document and the manager. If a GIFT City scheme you are offered does not appear in the tool, treat that as a reason to ask for its papers, not as a verdict on the fund.

US and Canada-based readers should also read the site's PFIC page, which says most Indian mutual funds and Category III AIFs are treated as PFICs.

• The ticket is large. USD 150,000 in a single private fund is a concentrated bet unless you are accredited and sizing smaller.
• The tax label is fragile. The specified fund status depends on who holds the units. Ask how the manager monitors investor residence, and what happens if an investor returns to India.
• Shares are still taxed. A long-only Indian equity scheme pays 12.5% to 30% on gains at the fund. "Tax-free" claims rarely survive this test.
• Rupee risk remains. Dollar units do not hedge an Indian portfolio, and hedging has a cost.
• Leverage is a disclosure item. With no regulatory cap, the downside in a leveraged long-short book depends on the manager's own limits.
• Liquidity is periodic. NAV is monthly at best, close-ended schemes can be extended by two years with two-thirds approval, and redemption terms sit in the memorandum.
• Rules move. The fund regulations were amended twice in 2026 and the tax law was renumbered this year. Documents drafted earlier may quote superseded provisions and rates.

A GIFT City Category III AIF is best understood as three stacked decisions. Structurally, it is a restricted scheme under IFSCA rules, with a USD 150,000 entry, leverage by disclosure and a manager who must usually co-invest. In currency terms, it gives you foreign-currency units, while leaving rupee risk in place whenever the portfolio is Indian. In tax terms, it works well for non-residents in a true specified fund, especially for derivative, debt and global strategies, and offers far less to long-only equity and to residents.

Use research tools for what they are good at. PMS Sahi Hai's compare pages and Nyra can help you line up strategies and track records; the structure, currency and tax answers in this guide still have to be checked against the scheme's own documents.

Shortlisting a fund is the easy part. The harder part is checking that the scheme in front of you is the structure you think it is. Ask the manager for the placement memorandum, the current investor mix, the leverage ceiling and the hedging policy, and take the tax note to your own adviser. Then compare the strategy against onshore PMS and AIF alternatives on the same post-tax, same-currency basis before you remit. You can start that comparison on PMS Sahi Hai's compare page, or ask Nyra to explain how a strategy has been scored, and bring the open questions to the manager.