Strip away the marketing language and GIFT City's core pitch is a tax pitch. If the same fund could be run with identical economics anywhere else, IFSC wouldn't have grown the way it has. Three specific mechanisms do most of the work.
Section 10(4D): the capital-gains exemption
Section 10(4D) of the Income Tax Act exempts specified income of a Category III AIF (and certain other IFSC-based funds) from tax, where the income arises from the transfer of specified securities, provided the fund satisfies IFSCA's conditions and reports appropriately. In practical terms, this is what lets a non-resident investor's gains inside a compliant GIFT City fund avoid the layer of Indian capital-gains tax that would otherwise apply to a comparable structure outside the IFSC.
Churn tax -- and why avoiding it is valuable
'Churn tax' is shorthand for the capital-gains tax triggered every time a fund's manager buys and sells securities inside the portfolio -- rebalancing, taking profits, rotating sectors. In a structure where this tax applies, active management has a real, compounding drag: every rebalance costs something before it even has a chance to add value. Funds routed through structures designed to avoid this friction (certain GIFT City structures included) let a manager actually manage the portfolio without a tax penalty attached to every decision.
No GST on fund management fees
Fund management fees charged from a GIFT IFSC entity to a fund are exempt from GST, unlike the domestic mutual fund industry where GST applies to management fees as a matter of course. For a fund with meaningful assets under management, this isn't a rounding error -- it's a real, structural cost advantage that can show up directly in a lower expense ratio.
The honest caveat
None of these exemptions are unconditional. They depend on the fund satisfying IFSCA's specific structural and reporting requirements, and on your own country of tax residence not clawing back the benefit through its own rules (foreign tax credit mechanics, controlled-foreign-corporation rules, and PFIC treatment for US persons are the ones that most often complicate the picture). GIFT City makes the Indian side of the tax equation clean; it can't make the other side of your tax residency disappear. Always confirm the full picture with a qualified advisor before assuming a headline exemption applies to you personally.
