What they learned running a fund in GIFT City? | Subtext by Zerodha

ELI5/TLDR

Two PMS operators from Philip Capital sit down with Zerodha to explain what GIFT City actually does. The short version: it’s an offshore financial zone inside India (between Ahmedabad and Gandhinagar), regulated by a single body called IFSCA, that lets foreign money come into India and Indian money go out without the usual paperwork hell. The big unlocks are NRI onboarding cut from 30-45 days down to 2, dollar-denominated reporting, and access to global themes (AI, cloud, medical devices) that India just doesn’t have. The most repeated correction: GIFT City is not tax-free. Capital gains still apply.

The Full Story

Why GIFT City exists at all

The pitch from Nishid Shah is straightforward. For decades, money flowing into India routed through Mauritius, Singapore, Bermuda, Luxembourg — the usual offshore plumbing. India had no offshore financial jurisdiction of its own. The gateway to Indian capital was sitting in someone else’s hands. GIFT City started as Modi’s Gujarat-CM-era brainchild and got real momentum after he became PM. Technically it’s an SEZ between Ahmedabad and Gandhinagar, but functionally it’s treated as offshore — a separate regulator, separate rules, dollar-denominated.

The framing Kashish lands on later in the conversation is the cleanest: pre-GIFT City, the gateway to Indian capital was Dubai or Mauritius; post-GIFT City, India controls its own gateway.

The onboarding problem GIFT City actually solves

This is where the conversation gets concrete. Roughly 30%+ of Philip Capital’s PMS book is NRI. Onboarding an NRI client through the traditional route requires:

A PAN card
An OCI card (which second and third generation NRIs often don’t have)
A savings bank account
A PIS account
A trading account
A demat account
And finally, the PMS account

Fifty to sixty signatures across the chain. Sign in blue first time, black second time, the bank rejects the form. The whole thing takes 30 to 45 days, with the lag sitting on the client and bank side, not Philip’s. Through their GIFT City fund (Philip India Billion Opportunities Fund), the same onboarding takes 2 to 3 days.

That’s the actual product. The regulatory and tax stuff is downstream of that operational unlock.

One regulator instead of three

In mainland India you deal with SEBI, RBI, IRDAI depending on what you’re doing. GIFT City has IFSCA — a single unified regulator. Nishid describes them as forthcoming and willing to expand the product menu, but also stringent because they don’t want a bad reputation. They’ve cribbed the good parts of SEBI/RBI rule-making and dropped the friction of having multiple regulators sign off on each new product.

Cost is the other quiet advantage. Setting up a fund structure in Mauritius or Singapore means paying legal counsel in dollars. GIFT City is in India, so legal and operational costs come in rupees, and skilled manpower is locally available.

The taxation correction

Both guests are emphatic on this. The “WhatsApp university” version of GIFT City — that it’s tax-free — is wrong. What’s actually true:

Operating businesses in GIFT City get a tax holiday for a defined period
There’s no GST on management fees and similar charges
But capital gains tax and income tax still apply

The mechanics differ by who you are and which side of the gateway you’re sitting on:

For an Indian investor putting money into a GIFT City fund that invests globally, capital gains get reported and paid in India just like any other investment. No escape.

For an NRI investing directly into Indian stocks via the traditional route, the bank deducts TDS on every gain (e.g., 20% short-term on the gain portion), and the NRI files a return in India at year-end to reconcile. For an NRI investing through a GIFT City fund into India, all taxation happens at the fund level. The fund pays Indian capital gains tax. The investor only files in their country of residence — Dubai (no tax on global income), or US (where they reconcile against the Indian tax already paid via a CAVEN statement).

The compliance burden moves from the investor to the fund. That’s the value.

There is one genuine tax break worth flagging: foreign investors trading derivatives through a GIFT City structure don’t pay capital gains tax on derivatives in India. Indian residents don’t get that.

Reporting in dollars

This is the smaller but underrated point. An NRI investing directly into an Indian PMS gets reporting in INR. The fund manager tells them their 50 lakhs became 60 lakhs, returns are 20%. The client correctly responds that when they wired the money, the dollar was at 82, now it’s 92, so their actual dollar return is much lower. A GIFT City fund reports in dollars, post-tax and post-expenses. The NAV already absorbs currency depreciation. No mental math required.

Money going out — the LRS plumbing

For Indian residents wanting global exposure, the pre-GIFT City options were:

Indian mutual funds running fund-of-fund structures into Hang Seng ETFs, FAANG ETFs, etc. (Most of these are now closed to new inflows because the industry-wide RBI overseas investment cap has been hit.)
Open an account in Singapore, Dubai, or directly in the US — only made sense for $100k-200k+ tickets.
Indian platforms with shaft-toning arrangements (newer, evolving).

Now the GIFT City route lets you remit under your $250k LRS limit per PAN per year and access US-listed equities, feeder funds, PMS, AIFs (Cat 1, 2, 3) — all dollar-denominated, all priced for smaller tickets. Philip Capital’s setup accepts as little as $1,000-$5,000.

Crucially, the RBI overseas-investment limits that have shut down domestic mutual fund inflows do not apply to GIFT City fund vehicles. So if you actually want global exposure and the local FOF window is closed, GIFT City is one of the few open doors.

Money coming in — who’s already there

All major global banks and most domestic AMCs have set up shop in GIFT City. The local houses are more active because they already had NRI client books and could immediately offer them the easier onboarding. Global family offices have started opening accounts too, partly catalyzed by the recent Middle East geopolitical situation pushing capital to look for safer Indian-exposed structures.

The structures available for inbound money are AIF Cat 1 (early stage / venture), Cat 2 (private equity, debt), and Cat 3 (long-short, listed equity strategies). Philip is running a Cat 3.

The three-reasons pitch for global investing

Nishid’s closing argument for why a retail investor should care:

Dollar diversification — INR has averaged 3-4% annual depreciation, with the last 15 months running hotter
Global diversification — the last 18-20 months proved that India doing well and global doing well are not mutually exclusive; sometimes global runs while India sits
Themes unavailable in India — AI, cloud computing, medical devices have no real listed proxies in India

The point both guests keep returning to: it’s not India or global, it’s India and global.

Key Takeaways

GIFT City’s killer feature is operational, not tax: NRI onboarding from 45 days to 2 days, single regulator (IFSCA) instead of three, dollar reporting that absorbs currency drift.
The “tax-free” claim is wrong. Capital gains still apply for Indian investors. The actual tax wins are no GST on fees and a derivatives carve-out for foreign investors.
For Indian residents wanting global exposure, GIFT City is now one of the few routes still open — most domestic FOF schemes are closed because they hit RBI’s overseas investment cap. GIFT City vehicles aren’t bound by that cap.
LRS limit of $250k per PAN per year is the binding constraint on outbound, not GIFT City itself.
Inbound capital structures: AIF Cat 1/2/3 plus PMS plus feeder funds. Cat 3 is what most equity-strategy houses are launching.
The strategic frame: India now controls its own offshore gateway. Mauritius and Dubai used to own that real estate.

Claude’s Take

This is a useful conversation but it’s a marketing conversation. Two PMS operators are explaining the product they run. The interviewer is generous with setups and never really pushes back. That’s fine — you get a clean, mostly-honest walkthrough of how GIFT City works in practice from people who deal with it daily — but it means certain questions don’t get asked.

What’s missing: how does fund performance net of GIFT City fee structures compare to just buying a US ETF through Interactive Brokers under LRS? What are Philip’s actual management fees on the Billion Opportunities Fund? What’s the AUM growth trajectory for IFSCA-regulated funds, and is the “everyone is here” claim backed by numbers? What happens to the tax holiday when it expires? Is there any concentration risk in IFSCA being a young, single regulator with limited adversarial history?

The most useful five minutes are the taxation correction and the NRI onboarding example. Both are concrete, both rebut common misconceptions, both are the kind of thing you can’t easily get from a Google search. The rest is good context but the kind of thing a financially literate person can derive from first principles.

Score: 7. Clean explainer with two genuinely useful sections. Loses points for being one-sided and for the audio quality requiring some patience with auto-transcribed words like “Mauritius” rendered as “Malaysia.”