GIFT City investments and Schedule FA reporting: why taxpayers are seeking greater clarity

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The rapid growth of investment opportunities in Gujarat International Finance Tec-City (GIFT City) has opened new avenues for Indian residents to access global markets. Through GIFT City funds and other IFSC-based investment vehicles, investors can gain international diversification while investing through structures established within India.

This blend of an Indian location and global exposure has also raised an important tax reporting question: should investments in GIFT City funds be disclosed as foreign assets in Schedule FA of the income-tax return when the underlying investments are located overseas?

The issue has attracted significant attention because Schedule FA forms part of India's foreign asset disclosure framework. Resident taxpayers who own assets located outside India are required to disclose such assets in their income-tax returns.

Given the consequences associated with non-reporting of foreign assets, taxpayers are increasingly seeking clarity on whether GIFT City fund investments fall within Schedule FA.

Given the consequences associated with non-reporting of foreign assets, taxpayers are increasingly seeking clarity on whether GIFT City fund investments fall within Schedule FA.

At the heart of the debate lies a simple question: What exactly does an investor own when investing through a GIFT City fund?

Many investors assume that because a fund invests in overseas shares, bonds or other foreign assets, their investment should automatically be regarded as a foreign asset. However, the position may not be so straightforward.

Under the Income-tax Act and the Black Money Act, the relevant reporting trigger is ownership of an asset "located outside India". The legislation does not refer to foreign exposure, overseas economic interest or investments funded through the Liberalised Remittance Scheme (LRS). Instead, the law focuses on the location of the asset owned by the taxpayer.

In most GIFT City fund structures, the investor owns units or interests issued by a fund established in the International Financial Services Centre (IFSC). The overseas shares and securities are typically held by the fund itself, not directly by the investor.

Therefore, the immediate asset owned by the taxpayer is a unit of an IFSC fund rather than the underlying foreign securities held in the fund's portfolio.

This distinction supports the view that units of a GIFT City fund should not automatically be classified as foreign assets. The location of an asset is generally determined with reference to the nature of the rights owned by the taxpayer. Accordingly, the analysis focuses on the asset the investor legally owns and where those rights are situated.

The principle is not new. Historically, both Indian and international tax frameworks have determined the location of assets based on their legal characteristics.

Support for this interpretation can also be found in a familiar market example.

Indian investors routinely invest in domestic mutual funds that, in turn, invest in foreign securities. Yet these mutual fund units are generally not regarded as foreign assets merely because part of the underlying portfolio is invested overseas.

Those supporting the GIFT City position argue that the same principle should apply to IFSC-based funds. The investor owns units in the fund—not the underlying securities purchased by the fund.

Another important aspect of the debate is the absence of a statutory "look-through" rule.

Indian tax law contains instances where Parliament has expressly chosen to look through the immediate legal asset to the underlying assets. However, no comparable provision currently exists for Schedule FA reporting in relation to GIFT City fund units.

Many tax professionals therefore believe that the location of the investment should be determined by the immediate asset owned by the taxpayer rather than by the fund's underlying portf...