(Xerxes Antia, Amit Baid and Agrima Choudhary)
1. A Snapshot
With the rising number of high-net-worth individuals (“HNIs”), family offices have emerged as a key vehicle for diversifying investment portfolios and accessing global opportunities. To facilitate this, a streamlined regulatory framework has been introduced in India, encouraging HNIs worldwide to establish family offices at the Gujarat International Fin-Tec City International Financial Services Centre (“GIFT IFSC”).
Situated in Gandhinagar, Gujarat, GIFT IFSC is India’s premier financial hub, offering seamless market access, a favorable tax regime, and world-class infrastructure. Positioned alongside global financial centers like Singapore and Dubai, it is emerging as a preferred destination for global investments, driving domestic economic growth and strengthening India’s global financial presence.
2. Exploring Family Investment Structures in GIFT IFSC
A family office is established as a Family Investment Fund (“FIF”), an authorised fund management entity in GIFT IFSC, regulated by the International Financial Services Centres Authority (Fund Management) Regulations, 2022. It may be established as a company, a contributory trust, a limited liability partnership or any other permitted form.
The FIF functions as a self-managed fund, pooling capital exclusively from a single family with limited exceptions for its employees, directors or other service providers under specific conditions. For this purpose, a ‘single family’ encompasses (i) lineal descendants of a common ancestor and includes their spouses including widows and widowers (whether remarried or not) and children (including stepchildren, adopted children, ex nuptial children); and (ii) entities such as sole proprietorship firm, partnership firm, company, limited liability partnership, trust or a body corporate in which such family members exercises control and holds substantial economic interest, either directly or indirectly.
3. Core Features of FIF
Permissible Investments: It is permitted to invest in:
securities issued by unlisted entities and securities listed, to be listed or traded on stock exchanges in IFSC, India or abroad;
money market instruments;
debt securities and securitized debt instruments, that are either asset backed or mortgage-backed securities;
other investment schemes set up in the IFSC, India and abroad;
derivatives including commodity derivatives;
units of mutual funds and alternative investment funds in India and abroad;
investment in limited liability partnerships;
physical assets such as real estate, bullion, art, etc.; and
such other securities, financial products/ assets or instruments as specified by the IFSCA.
FIFs offer flexibility to invest across diverse asset classes, including bullion and art, enabling a broader portfolio than conventional routes such as under Liberalized Remittance Scheme issued by the Reserve Bank of India (“RBI”) (“LRS”), Overseas Direct Investment (“ODI”) or Overseas Portfolio Investment (“OPI”). Unlike these routes, FIFs are not restricted by Indian foreign exchange control regulations, for instance, while resident individuals face an annual foreign investment cap of USD 250,000 and Indian entities can only acquire foreign assets for business purposes, FIFs can freely invest in global assets without such limitations.
Relaxations: GIFT IFSC offers enhanced flexibility to Indian entities not engaged in financial services activities by exempting them from the requirement to maintain a 3 year profitable track record when investing in an entity engaged in financial services activities outside India, a condition otherwise applicable under Indian foreign exchange control regulations.
4. Tax Benefits in GIFT IFSC
FIFs are regarded as Indian tax residents and required to pay taxes in India. However, GIFT IFSC offers a range of compelling tax incentives and exemptions for FIFs, making it an attractive hub for high-net-worth families. These incentives include:
10-Year Tax Holiday: FIFs can benefit from a 100% tax exemption on their “business income” for up to 10 consecutive years within first 15 years of their operations. Additionally, companies opting for the concessional tax regime are fully exempt from the Minimum Alternate Tax (“MAT”), i.e. their MAT liability is also NIL.
Reduced Dividend Tax: Non-resident investors receiving dividends from FIFs set up as companies are taxed at a concessional rate of 10%, plus applicable surcharge and cess.
Tax-Free Interest Income: Interest earned by non-residents on loans extended to FIFs is exempt from Indian taxation.
Concessional Tax on Bond Interest: Interest income from investments made by FIF in certain long-term or rupee-denominated bonds listed on GIFT IFSC exchanges is subject to reduced tax rates of 4% for bonds issued before July 1, 2023 and 9% for bonds issued thereafter.
Custom Duty & Goods and Services Tax (“GST”) Exemptions: Goods imported into GIFT IFSC from outside India are exempt from customs duty. Additionally, services received by FIFs are exempt from GST. Services provided by FIFs to clients outside India or to other GIFT IFSC units, are also exempt from GST.
Exemptions on Transaction Taxes & Stamp Duty: FIFs are exempt from Securities Transaction Tax (“STT”) and stamp duty on trades conducted on GIFT IFSC exchanges.
State Subsidies: FIFs can avail various state subsidies, such as reduced lease rentals, provident fund contributions and electricity charges, further lowering operational costs.
GIFT IFSC offers tax incentives to attract global family wealth management, enabling high-net-worth families to consolidate their assets into investment funds in GIFT IFSC with minimal tax liabilities. However, remittances by resident individuals to FIFs under LRS are subject to a tax collection at source at the rate of 20%.
5. Strategic Investment Scenarios and Their Implications
Classified as a person resident outside India under Indian foreign exchange control regulations, an FIF must conduct all transactions in foreign currency, with investments in Indian entities subject to applicable Indian foreign exchange control regulations for India entry routes, as applicable. The FIF can be open- or close-ended, requiring a minimum corpus of USD 10 million within 3 years of registration. To meet this, it can leverage foreign currency financing from banks in GIFT IFSC, offering a cost-effective alternative to high-cost funding from India.
Key investment scenarios in FIFs and conditions thereto are outlined below:
Investment by Indian Resident Individuals
Indian resident individuals can invest in FIF under the LRS, subject to an annual limit of USD 250,000 per individual.
Remittance under LRS are subject to Tax Collection at Source (“TCS”) at the rate of 20%.
Investment by Non-Resident Indians (“NRIs”) and Persons of Indian Origin (“PIOs”) (via NRE/NRO Account)
NRIs and PIOs can invest in FIF using funds from their Non-Resident External (“NRE”) or Non-Resident Ordinary (“NRO”) accounts.
Remittances upto USD 1,000,000 per financial year are permitted from NRO accounts.
Funds from NRO accounts are repatriable up to USD 1,000,000 per financial year, while funds from NRE accounts are fully repatriable without limits.
NRIs and PIOs must submit an undertaking to authorized dealer banks regarding the source of funds.
Investments from NRE accounts or directly from outside India fall outside the scope of Indian overseas investment framework and investors can avail all non-resident benefits for such investments.
No TCS applies to remittances from NRE/NRO account.
Investment by Non-Residents (Other Than NRIs/PIOs)
Non-resident individuals (non Indian origin) can invest in FIFs in adherence to Indian foreign exchange control regulations.
Such investors may benefit from ‘double taxation avoidance agreements’ between India and their host countries for income earned from these investments.
Under Indian foreign exchange control regulations, foreign investment in entities investing in the capital of Indian companies or limited liability partnerships requires prior government approval unless registered as a non-banking financial company (“NBFC”) with the RBI. However, foreign investment in an FIF is exempt from this approval requirement.
Investment by Indian Operating Entities
Investment as ODI:
Investments are capped at 400% of the entity’s net worth.
Indian entity not engaged in financial services can invest in FIF and are exempted from the 3-year profitability condition generally required for investments in foreign entities.
Investment as OPI: Investments are capped at 50% of the entity’s net worth.
Investment by Indian Entities Classified as NBFCs
An Indian entity qualifies as an NBFC if its financial assets and income exceed 50% of its total assets and income.
Investment as ODI: Investments are capped at 400% of the NBFC’s net worth, requiring prior approval from the RBI for the proposed investment.
Investment as OPI: Investments are capped at 50% of the NBFC’s net worth.
Investment in a single FIF are capped at 15% of the NBFC’s owned funds.
NBFC must be profitable for the preceding 3 financial years, registered with RBI and comply with necessary prudential norms and reporting obligations.
Investment by Family Offices Structured as Alternative Investment Funds in India
Family offices structured as Alternative Investment Funds registered as such with the Securities Exchange Board of India (“AIFs”) can invest in FIFs, ensuring tax efficiency and global competitiveness.
These investments are categorized as OPI and are subject to overall limit of USD 1500 million.
Category I and II AIFs can invest upto 25% of their investible funds, while Category III is limited to 10%, in compliance with the conditions provided under the Securities Exchange Board of India (Alternative Investment Fund) Regulations, 2012.
This comprehensive framework ensures that diverse categories of investors can engage with FIFs while complying with Indian regulatory and taxation requirements.
6. Regulatory Conundrum
Treatment of remittances:
The Indian overseas investment framework’s use of the term “may” when classifying investments in GIFT IFSC as OPI creates ambiguity. While the Indian entities can remit funds under the OPI route, certain cases may reclassify these as ODI, such as acquiring unlisted equity capital or subscribing to the memorandum of association of a foreign entity, holding 10% or more of the paid-up equity capital of a listed foreign entity or exercising control over a foreign entity.
This uncertainty carries significant implications. Under the Indian overseas investment framework:
Indian entities can invest up to 400% of their net worth via the ODI route, while OPI is limited to 50%; and
individuals can invest up to USD 250,000 per financial year.
Given the substantial differences in investment thresholds between ODI and OPI, a formal regulatory clarification is essential to provide certainity and support informed investment decisions.
Source of funds:
While the establishment of FIFs at GIFT IFSC is legally permitted, regulators remain vigilant to prevent misuse. One concern is the potential for FIFs to serve as a mechanism for transferring funds offshore beyond permissible limits.
To address this, the regulator is likely to prioritize allowing the establishment of FIFs by offshore families or by individuals or entities demonstrating that funds originate from offshore sources. This approach mitigates the risk of FIFs being misused as conduits for exceeding regulatory remittance limits.
7. The Future Landscape
Potential Growth of FIF: The growing HNI population and an increasing demand for professional wealth management services, signals a significant opportunity for family offices. With increasing awareness of FIF benefits, GIFT IFSC is poised to become a premier hub for efficient family wealth management and expansion.
Regulatory certainty: A clear directive from the regulator on whether investments in FIFs are classified as OPI or ODI would address the current ambiguity. Such regulatory clarity would foster confidence and encourage more families to establish FIF.
8. Wrapping Up
India’s growing economy and GIFT IFSC’s investor-friendly framework make it a strategic hub for family offices. Establishing an FIF at GIFT IFSC offers high-net-worth families streamlined investments, competitive advantages over global financial hubs and portfolio diversification beyond domestic assets. With robust infrastructure and regulatory support, it enables family offices to efficiently manage wealth, uphold legacy values and expand their global investment reach.