Rich foreigners will now get tax-free access to Indian MFs
It is an unprecedented move that is likely to open the flood gates for infusion of fresh funds by foreigners into India’s stock market. One of India’s leading asset management companies (AMCs)—HDFC AMC has secured approval to start six feeder funds in GIFT City (IFSC) that will in turn invest in its domestic mutual fund (MF) schemes. The feeder funds will be structured as Category III AIFs, or alternative investment funds.
Funds located in GIFT City that buy and sell MF units in India are not subject to capital gains taxation in India. This, though, does not hold true for stocks: the same feeder funds will be subjected to short-term capital gains of 15% or long term capital gains of 10% depending on their holding period for the stocks they have sold. Since category III AIFs are taxed at the scheme level, unlike category I and II AIFs which are pass-through vehicles for tax purposes, the investors in GIFT City will also not pay any tax at the time of redemption.
The six AIFs will have a daily net asset value denominated in US dollars and will be available for purchase and redemption on a daily basis. Currently, foreign citizens wishing to invest in India must register as foreign portfolio investors, or FPIs, in India which is a cumbersome process. By contrast, GIFT City funds will have a simple KYC (know your customer) format.
The investors in these funds will not be mandated to open bank accounts in GIFT City. After KYC and registering with the fund administrator, they can directly remit money from their foreign bank accounts. The move could also be beneficial to non-resident Indians (NRIs).
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