Taxation of GIFT City Funds Under Section 10(4D): A 2026 Guide

At its core, Section 10(4D) grants a fund-level income-tax exemption to a category of IFSC vehicles the law calls a "specified fund." In plain English: a qualifying fund set up in GIFT City's IFSC does not pay Indian income tax on certain defined streams of income chiefly income from offshore securities and from securities other than shares in Indian companies to the extent that its units are held by non-residents.

The one-line version is deceptively simple, but three words carry all the weight. "Specified fund" decides who gets the benefit. "Certain income" decides what is exempt. And "attributable to non-residents" decides how much is exempt. Miss any one of them and you will either overestimate the benefit or misapply it entirely. You can read the bare provision in the Income-tax Act, 1961, but the Act's language is dense the sections below translate it.

The reason the provision exists is strategic. India wanted to onshore the fund-management activity that its own diaspora and institutions were routing through foreign financial centres. To do that, it had to match those centres on tax. Section 10(4D) is the centrepiece of that answer: a purpose-built exemption that makes an IFSC Category III AIF competitive with a fund domiciled abroad without asking global investors to leave the Indian regulatory perimeter.

GIFT City did not begin as a tax story. Gujarat International Finance Tec-City started as an ambitious special-economic-zone township meant to host India's first International Financial Services Centre. The regulatory scaffolding arrived in stages: SEBI issued the first IFSC guidelines in 2015, opening the door for exchanges, intermediaries, and funds to operate in a ring-fenced, largely offshore-equivalent environment. You can see the government's own framing of the regime on Invest India.

Two developments turned the experiment into a genuine hub. First, the tax architecture: Section 10(4D) was introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, giving IFSC-based Category III AIFs a bespoke exemption for the first time. Second, the regulator: in 2020, the International Financial Services Centres Authority (IFSCA) was created as a single, unified regulator for the IFSC, folding together powers previously spread across the RBI, SEBI, IRDAI, and PFRDA. You can explore the authority directly at IFSCA.

From there, the framework matured quickly. The IFSCA (Fund Management) Regulations, 2022 replaced the older category-by-category approach with a modern, manager-led model registered Fund Management Entities running restricted, retail, and venture schemes. The Central Board of Direct Taxes (CBDT) then notified the computation rules for the exemption in 2021, and successive budgets kept widening the aperture: Budget 2024 extended exemptions to retail schemes and ETFs, and Budget 2025 pushed several IFSC sunset dates out to 31 March 2030. In under a decade, a township became a jurisdiction.

This is the single most misunderstood part of GIFT City fund taxation, so it deserves precision. The Section 10(4D) exemption is not available to any fund that happens to sit in GIFT City. It is available only to a "specified fund," and the definition is narrow by design.

A specified fund is principally a Category III Alternative Investment Fund (AIF) that is:

• located in an IFSC (i.e., GIFT City),
• regulated under the SEBI (AIF) Regulations or the IFSCA framework, you can see the underlying AIF regime on SEBI's site, and
• structured so that all of its units, other than those held by the sponsor or manager are held by non-residents.

That last condition is the gatekeeper. The clean, fund-level exemption is engineered around non-resident capital. The moment resident investors hold ordinary units, the picture changes, because the exemption is only ever granted to the extent income is attributable to non-resident-held units (more on that formula shortly). The definition also separately covers the investment division of an offshore banking unit (IBU) a route more relevant to banks than to typical fund investors.

Historically, the benefit was aimed squarely at Category III AIFs the hedge-fund-style vehicles that run long-short, arbitrage, and market-neutral strategies with leverage. But the regime has broadened. As reported when the change was announced, Budget 2024 extended these exemptions to retail schemes and ETFs in the IFSC, giving them treatment comparable to Category III AIFs. As Rahul Jain, Partner at Khaitan & Co., summarised when the measure was announced, these instruments now receive "a concessional tax rate of 10 per cent on interest and dividend income and capital gains tax exemption on various securities (other than shares in Indian companies)," effective from Assessment Year 2025-26. In short, the club of "specified funds" is getting larger, not smaller.

Once a fund qualifies, Section 10(4D) exempts specific categories of income, not everything the fund earns. The exempt buckets are, broadly:

• Gains from transferring capital assets referred to in Section 47(viiab) think bonds, GDRs, rupee-denominated bonds, derivatives, and foreign-currency-denominated securities — when traded on a recognised IFSC stock exchange and the consideration is paid in convertible foreign exchange.
• Income from the transfer of securities other than shares in an Indian company.
• Income from securities issued by a non-resident (not being a permanent establishment in India), where that income does not otherwise accrue or arise in India.
• Income from a securitisation trust that is chargeable under the head "profits and gains of business or profession."

Two honest caveats keep this from becoming a fantasy. First, the exemption applies only to the portion attributable to non-resident unitholders the resident-attributable slice is not exempt. Second, income that falls outside these buckets most importantly, gains on shares of Indian companies and income attributable to resident investors remains taxable, though often at the concessional rates discussed next. This is precisely why one respected commentary framed GIFT City as "not a tax shelter" but a deliberate "tax architecture" the benefit is real, conditional, and rules-bound.

Here is the part almost every competitor page skips and it is the part that separates a correct understanding from a marketing slogan. The phrase "to the extent attributable to non-residents" is not vague; it is a formula. The CBDT prescribed the methodology through Notification No. 90/2021, dated 9 August 2021, inserting two rules and two forms.

• Rule 21AI computes the exempt income of a specified fund under Section 10(4D). The exempt portion of each income stream is multiplied by a ratio: the aggregate daily "assets under management" (AUM) held by non-resident unitholders divided by the total aggregate daily AUM over the relevant holding period. The fund reports this in Form 10-IG.
• Rule 21AJ computes the income that is taxable at the concessional rate under Section 115AD. It applies a similar non-resident-AUM ratio to capital gains and to income received on securities, reported in Form 10-IH.

The practical upshot is that a specified fund must track its unit-holding composition daily, because the split between resident and non-resident capital on every day of the holding period determines how much income is exempt versus concessionally taxed. This is a data problem as much as a tax problem which is exactly why fund administrators lean on software, and why professional bodies like KPMG published detailed methodology notes when the rules landed. Get the daily-AUM tracking wrong and the exemption claim in Form 10-IG becomes indefensible.

Section 10(4D) is the headline, but it works as part of a stack of provisions. Understanding the stack is what turns "GIFT City is tax-efficient" into a number you can actually model.

Section 115AD: the concessional rate. Where a specified fund's income is taxable (for example, dividend and interest income on securities, on the resident-attributable portion), it is taxed at a concessional 10% (plus surcharge and cess) rather than at higher regular rates. Capital gains follow the Section 111A/112A framework. Note the 2024–2025 recalibration: the long-term capital-gains rate for FIIs and Category III specified funds was aligned upward to 12.5%, while short-term gains on listed equity moved to roughly 20%, following the Finance Act, 2024 changes and their extension into AY 2026-27.

Section 10(23FBC): the investor-level exemption. Income received by a unitholder from a specified fund, and gains on the transfer of the fund's units, are exempt in the investor's hands. This is what prevents a second layer of Indian tax after the fund level, a crucial piece for NRIs.

Section 80LA: the 100% tax holiday. An IFSC unit can claim a 100% deduction of its business income for any 10 consecutive years out of 15 a decade-long holiday that underpins the economics of setting up in the IFSC in the first place.

Indirect and other reliefs. There is no Securities Transaction Tax (STT) or Commodity Transaction Tax (CTT) on IFSC-exchange trades, stamp-duty relief on those transactions, a GST exemption on fund-management services provided to IFSC funds, and MAT/AMT at a concessional 9% where applicable. The regulator-hosted EY–IFSCA tax paper (Feb 2025) lays out these rates in detail.

Here is the stack at a glance:

The statute is only half the story; the other half is how this plays out in a live, digitising market. Qualifying trades happen on fully electronic, USD-denominated IFSC exchanges India INX and NSE IX where settlement, clearing, and reporting are digital by default. Fund Management Entities onboard investors through digital KYC, e-signatures, and online subscription flows, compressing what used to be a multi-week offshore setup into days.

The daily-AUM attribution that Rules 21AI and 21AJ demand is, at heart, a RegTech problem: administrators run systems that record non-resident versus resident holdings every single day and auto-populate Forms 10-IG and 10-IH at year-end. And on the investor side, the market has moved decisively toward AI-assisted decision-making platforms that read the dense fund documents, surface the tax and fee clauses, and let an NRI or family office compare structures without decoding the Act line by line.

This is where a marketplace lens matters. India's first AI-powered PMS & AIF marketplace, PMS Sahi Hai which tracks 1,200+ PMS and AIF strategies, spanning 430+ PMS firms and 250+ AIFs now maps these IFSC strategies alongside domestic ones, showing the tax treatment across jurisdictions so investors see post-tax reality, not gross brochure returns. When Budget 2025 extended IFSC sunset dates to 2030 and widened relocation relief, the competitive question stopped being "Is GIFT City worth it?" and became "Which IFSC structure fits me, after tax?", a comparison problem, not a curiosity.

The benefits are best understood as a set of compounding advantages rather than a single perk:

• A genuine fund-level exemption on offshore income. Under Section 10(4D), a qualifying specified fund pays no Indian income tax on its defined offshore and securities income to the extent attributable to non-resident units. For globally invested capital, that removes an entire layer of drag.
• Concessional 10% where tax does apply. Even on the taxable slice, Section 115AD caps securities income at 10%, far below regular rates a decisive edge over a domestic Category III AIF, which is taxed at the fund level at high rates with no comparable exemption.
• No double layer for investors. Section 10(23FBC) exempts income and unit-transfer gains in the investor's hands, so non-residents are not taxed again after the fund level.
• A decade-long business-income holiday. Section 80LA's 100% deduction for 10 of 15 years anchors the economics for managers and sponsors setting up in the IFSC.
• Transaction-cost and indirect-tax relief. No STT/CTT, stamp-duty relief, a GST exemption on management fees, and 9% MAT/AMT together lower the all-in cost of running and investing through such a fund and, uniquely, all of it sits inside an Indian-regulated, USD, DTAA-accessible wrapper.

Beyond the arithmetic, the provision solves a real-world friction that plagued Indian and NRI capital for decades: the choice between staying onshore (and paying more tax) or going offshore (and taking on foreign jurisdiction, currency, and reputational complexity). Section 10(4D) collapses that trade-off.

For a fund manager, it means you can raise and deploy global capital from an Indian address, under a single regulator (IFSCA), in US dollars, with tax treatment that no longer forces a Mauritius or Singapore detour. For an NRI or foreign investor, it means access to Indian and global securities strategies through a transparent, regulated vehicle whose distributions are exempt in your hands with none of the opacity that historically shrouded offshore structures. For a family office, it means consolidation: global and Indian exposure, managed and reported in one place, under one legal regime.

In other words, the clause does not just save tax, it simplifies a cross-border problem into one comprehensible, domestic-but-global framework. That simplification is the quiet reason the IFSC's fund assets have climbed budget after budget.

A guide that only sells the upside is not a guide. Here are the limits you must weigh.

It is not tax-free for everyone. The clean fund-level exemption is built around non-resident unitholders. Resident Indians investing via the Liberalised Remittance Scheme see the RBI for LRS limits and conditions are generally taxed in India on their gains like any other investment, and the fund-level exemption simply does not extend to the resident-attributable portion.

The compliance is real. The daily-AUM attribution under Rules 21AI/21AJ and the annual Form 10-IG/10-IH filings are materially heavier than a plain domestic mutual fund. This is an operational cost, not just a footnote.

"Tax-free in India" is not "tax-free everywhere." This is the trap that catches the diaspora. A US person may face Passive Foreign Investment Company (PFIC) treatment and annual Form 8621 filing see the IRS while a UK resident must report worldwide income to HMRC. The Indian exemption does not override your residence country's tax, and a Double Taxation Avoidance Agreement offers limited relief when there is no Indian tax to credit.

The law keeps moving. Several benefits carry commencement and sunset conditions many extended to 31 March 2030 in Budget 2025 and the regime is amended almost every year. A structure that is optimal today must be re-checked against the current Act.

Access barriers apply. USD-denomination, minimum-ticket thresholds, and NRI/foreign-investor eligibility mean GIFT City funds are not a mass-retail resident product. They reward informed, larger, cross-border investors.

Section 10(4D) is a perfect example of what we at PMS Sahi Hai call the inner clause the buried, technical language that quietly decides your post-tax outcome long after the glossy pitch deck has done its job. Hard-earned wealth shouldn't rely on random advice, and it certainly shouldn't rely on a marketing line that says "tax-free" without the three conditions attached.

As India's 1st AI-powered PMS & AIF marketplace, PMS Sahi Hai exists to make exactly this kind of complexity legible. Our platform compares 1,200+ PMS and AIF strategies including GIFT City and IFSC funds with independent, SEBI/APMI-registered analysis rather than commission-driven pitches. If you are weighing a Category III AIF at GIFT City, you can start with the fundamentals on our What is AIF? explainer, run a side-by-side on the AIF comparison tool, and pressure-test the specifics against our AIF Categories.

The intelligence layer is Nyra - your AI Wealth Compass. Nyra reads across every SEBI-registered PMS, AIF, and GIFT City fund, scores each strategy on seven pillars, and crucially for a topic like this cites its sources and surfaces the tax implications, fees, overlap, and manager quality rather than hiding them. For NRIs, Nyra maps DTAA treatment across 20+ countries and flags PFIC-safe structures for US investors, so you see how a Section 10(4D) exemption actually lands after your home-country rules apply. That is the difference between reading a clause and understanding it. You can meet Nyra directly at the Nyra app.

Section 10(4D) is not a loophole and not a gimmick; it is a carefully engineered incentive that makes a qualifying specified fund genuinely competitive with the world's leading financial centres,  for the right investor, under the right conditions. The exemption is real, the concessional 115AD rate is real, the 10(23FBC) investor exemption is real, and the 80LA holiday and indirect-tax reliefs are real. Equally real are the conditions: the non-resident unitholder requirement, the daily-AUM attribution math, the compliance burden, and above all the fact that Indian exemption says nothing about the tax you owe at home.

Read that way, the taxation of these funds stops being a slogan and becomes a strategy. The investors who win with it are the ones who understand the inner clause before they wire the money and who compare structures on post-tax reality, not gross promises.

If you are evaluating a GIFT City fund or any Category III AIF, don't stop at the headline exemption model the post-tax reality for your residency status first. Let Nyra, your AI Wealth Compass, do the heavy lifting: compare 1,200+ SEBI-registered PMS, AIF, and GIFT City strategies, decode the inner clauses, and see the tax, fees, and overlap in one place. Start your comparison on the Nyra app, explore PMS Sahi Hai, or book a private consultation with our advisory team because hard-earned wealth shouldn't rely on random advice.