How to invest abroad through GIFT City: A step-by-step guide

Resident Indians looking to invest abroad can do so through dollar-denominated funds based in GIFT City, the international financial centre in Gujarat. This offers an alternative to investing directly in foreign stocks through overseas brokers, a route examined in an earlier Business Standard article. Here is how to invest through GIFT City, from choosing a fund to transferring money.

The route has drawn interest because many international mutual funds from domestic fund houses have stopped taking fresh money. The mutual fund industry as a whole has reached the $7 billion overseas investment limit set by the regulators, and funds based in GIFT City are not subject to that limit.

Why consider GIFT City

One attraction is regulatory oversight. GIFT City funds come under the International Financial Services Centres Authority (IFSCA), an Indian regulator. Investors using overseas brokers may have limited recourse through Indian regulators if something goes wrong, says Deepesh Raghaw, a Securities and Exchange Board of India (Sebi)-registered investment advisor and founder of PersonalFinancePlan.in. Those seeking to avoid cross-border disputes may prefer Indian funds or the GIFT City route, he says.

Another reason is to hold assets in dollars. The rupee has tended to weaken against the dollar over time, so dollar assets can cushion that fall. Hema Thakkar, head of business development (alternatives) at PPFAS, says investors use these funds to build a dollar corpus for goals like a child’s education abroad, where the bills will be in dollars. A Balasubramanian, managing director and chief executive of Aditya Birla Sun Life Asset Management Company (AMC), also cites overseas education and travel.

Also Read

The market, however, is still developing. GIFT City was established primarily to attract foreign and non-resident Indian (NRI) investment into India, Raghaw says, and outbound retail funds remain a small segment. There are “not too many outbound funds here”, although he describes the digital process as “quite seamless” and “getting streamlined as we speak”.

Balasubramanian agrees that outward investment is only one part of GIFT City’s business, with attracting money from NRIs and people of Indian origin abroad remaining a larger priority.

Before you start

First, decide how much to invest. “Some portion of the money, which is, say, 5 per cent or 10 per cent, can be diversified abroad,” Balasubramanian says, adding that his own investment focus remains “predominantly” on India. Raghaw suggests limiting overseas exposure to 10-15 per cent of a portfolio.

Next, choose a fund. Passive funds of funds invest in overseas index funds or exchange-traded funds (ETFs) that track market indices. Feeder funds channel money into an existing overseas fund managed by another entity. Active funds select global stocks directly.

The following funds are currently available:

Details on HDFC, DSP, Marcellus and JioBlackRock in this article are as per their GIFT City websites. PPFAS says its two funds had combined assets of about $75.8 million as on October 30, while Edelweiss’ Greater China fund managed about $10.2 million at the end of October.

Four more funds are in the pipeline. Aditya Birla Sun Life’s Emerging Market Equity Fund, a feeder fund with a $500 minimum, has closed its launch offer and will reopen for investment on November 13. Edelweiss’ US Technology Equity Fund and JioBlackRock’s Advantage World Equity Fund, a feeder fund with a $5,000 minimum, are currently in their launch offers, while Franklin Templeton is preparing its Franklin US Equity IFSC Fund.

The process: Two steps

Fund houses say the process is simple and can be completed online in about 10 minutes: open an account, then transfer the money.

Step 1: Open an account

Investors first open a folio — an account with the fund house — by completing know-your-customer (KYC) checks. The folio remains empty until the investment money arrives.

• Online: Enter your Permanent Account Number (PAN), verify your identity digitally using Aadhaar, provide bank details and proof, and sign electronically.
• Offline: Complete a paper application, attach a self-attested PAN copy, photo identification and bank proof, such as a cancelled cheque, and submit the documents to the fund house.

Requirements vary slightly. Marcellus asks only for PAN and Aadhaar for online verification, while Edelweiss has its own onboarding journey.

There is no common KYC registry across GIFT City fund houses yet, Thakkar says, so investors must submit documents separately to each one.

Step 2: Send the money

The next step is to remit rupees for conversion into dollars. This falls under the Reserve Bank of India’s (RBI’s) Liberalised Remittance Scheme (LRS), which allows resident individuals to remit up to $250,000 per financial year.

The bank converts the rupees into dollars and transfers the amount to the fund.

• Online: Investors pay through the fund house’s website using net banking and an authorised payment partner, a company that handles the conversion of rupees into dollars and the transfer through your bank. PPFAS and Marcellus use Glomopay, a payment service provider licensed by IFSCA, within their own onboarding journeys. HDFC and DSP offer net-banking facilities without naming their payment partners. HDFC Bank, ICICI Bank, Axis Bank and IDFC First Bank appear on most supported-bank lists, with some also including Kotak Mahindra Bank. Marcellus requires customers of other banks to pay offline.
• Offline: Investors submit Form A2, the form banks use to process foreign remittances under LRS and record their purpose, at their bank, which then transfers the dollars.
• Tax collected at source: Aggregate LRS remittances exceeding ₹10 lakh in a financial year attract tax collected at source (TCS) at 20 per cent on the amount above the threshold for investment purposes. The amount collected can be claimed as credit against income-tax liability.

Transfers generally take one to three days. PPFAS estimates two to three days through Glomopay and next-day receipt through a bank branch. Marcellus says its bank takes about one working day, while Aditya Birla Sun Life estimates three days. Edelweiss says the timing depends on when the funds are credited, which is quicker when paid online through its five supported banks.

PPFAS, DSP, Edelweiss and Aditya Birla Sun Life generally allot units about a day after the funds arrive. In all, expect about two to five days from paying to receiving units. Online is usually quicker overall because the account opens in minutes, while paper applications can add a few working days. The timelines below are as stated by the fund houses and may be measured from different starting points.

Banks also charge a markup on the rupee-dollar exchange rate, which varies by bank, Thakkar says. Investors should compare the conversion rate and charges before remitting money.

After you invest: How taxation works

Under the applicable fund-level taxation structure, the fund pays tax on its income. Its net asset value (NAV) — the price of one unit — reflects that tax, so investors do not face another layer of Indian tax on redemption gains covered by this treatment.

“Taxation is not at the investor level. Taxation is at the fund level,” Thakkar says. PPFAS, DSP, HDFC and Marcellus describe their NAV calculations on this basis.

The holding period still matters. PPFAS says units held for more than 24 months are redeemed at a long-term post-tax NAV, while shorter holdings are redeemed at a short-term post-tax NAV. Tax on the fund’s gains is about 42.7 per cent for holdings of up to 24 months and 14.95 per cent beyond that, according to DSP’s website.

Redemption proceeds are paid into the investor’s bank account in rupees.

Expense ratios and exit loads vary across funds and will be examined in the next article.