The relocation of funds from outside India to GIFT City is a significant opportunity for fund managers. The Income Tax Act, 2025 provides tax-neutral treatment for such relocations under Section 70(1)(t) and (u). Understanding the tax treatment is essential for funds considering relocation.
The Statutory Framework
Section 70(1)(t) and (u)
Section 70(1)(t) provides that the provisions of Section 67 shall not apply to a transfer in a relocation, of a capital asset by the original fund to the resulting fund. Section 70(1)(u) provides the same for transfers by shareholders or unit holders.
Definition of Original Fund
"Original fund" means a fund established or incorporated or registered outside India which collects funds from its members for investing it for their benefit, fulfilling conditions including:
- Not being a person resident in India
- Being a resident of a country with which India has a tax treaty or notified territory
- Being subject to applicable investor protection regulations
Definition of Resultant Fund
"Resultant fund" means a fund established or incorporated in India in the form of a trust or company or limited liability partnership, located in an IFSC, which has been granted registration as a Category I, II, or III Alternative Investment Fund.
Tax Treatment
Transfer Not Regarded as Transfer
The transfer of capital assets in a relocation shall not be regarded as a transfer for capital gains purposes. This provides tax-neutral treatment for the relocation.
Capital Gains Exemption
Income of the nature of capital gains arising from the transfer of shares by the resultant fund or a specified fund, where such shares were transferred from the original fund in relocation, and where the capital gains on such shares were not chargeable to tax if relocation had not taken place, is exempt.
Attribution to Non-Residents
The income not to be included in the total income shall be to the extent attributable to units held by non-residents (not being a permanent establishment of a non-resident in India).
Conditions for Relocation
Timeline
Relocation must occur on or before 31 March 2030.
Consideration
Consideration for the transfer must be discharged in the form of share or unit or interest in the resulting fund to shareholders or unit holders in the same proportion.
Category III AIF Condition
Where the resultant fund is a Category III AIF, the original fund must fulfil the condition that aggregate participation or investment by persons resident in India does not exceed 5% of the corpus at the time of transfer.
Compliance Requirements
Form 178
The specified fund must furnish an annual statement of exempt income in Form No. 178.
Certification
The annual statement must be certified by an accountant in Form No. 179.
Documentation
Maintain documentation demonstrating:
- Compliance with relocation conditions
- Resident participation percentage
- Valuation of assets transferred
Expert Legal Guidance
Understanding fund relocation tax treatment is essential for funds considering relocation to GIFT City. Anuj Desai & Associates provides expert advisory services on IFSC tax compliance, helping funds navigate the relocation process.