Budget 2025: P-notes from Gift City set to rise with new relaxations

Relaxations announced in Budget could prompt FPIs issue P-notes from Gujarat over Mauritius, Singapore

Issuance of offshore derivative instruments (ODIs), popularly known as participatory notes (P-Notes), from the Gift City is expected to rise following the relaxations announced in the Budget for entities operating out of the International Financial Services Centre (IFSC).

 

Experts believe that the freshly announced measures make it more attractive to issue P-notes from Gift City compared to offshore jurisdictions such as Mauritius and Singapore.

 

In her Budget speech, Finance Minister Nirmala Sitharaman announced an exemption on any income accruing or arising to, or received by, a non-resident due to the transfer of non-deliverable forward contracts entered into with FPIs in the IFSC. This measure is expected to encourage offshore entities to shift their ODI business from other jurisdictions and allow non-bank FPIs, such as broker-dealers and alternative investment funds, to issue ODIs in the IFSC.

 

Moreover, FPIs may find it more advantageous to establish their operations in the IFSC rather than jurisdictions like Singapore. While FPIs in Singapore must adhere to stringent conditions to avail a beneficial tax rate of 15 per cent on dividends under the India tax treaty, the same rate in Gift-IFSC is 10 per cent with more lenient norms.

 

Suresh Swamy, Partner at Price Waterhouse & Co LLP, explained, “If an entity in Singapore is buying equity in India, it will be writing ODIs. The dividends will be subject to a 15 per cent tax under the tax treaty-provided certain conditions are met, such as being a tax resident of Singapore and having beneficial ownership of the dividend. In contrast, in Gift City, there are no such conditions, and the tax rate is only 10 per cent for specified funds.”

 

He added that the new provisions offer certainty of tax benefits, unlike those in Singapore, which come with conditions. If these conditions are not met, entities may face a higher tax outgo of up to 40 per cent.

 

Rajesh Gandhi, Partner at Deloitte, said, “The withholding tax rate on dividends in Gift City is 10 per cent, which is lower than the 15 per cent rate in Singapore. Fund managers investing through Singapore must comply with anti-avoidance rules under India’s General Anti-Avoidance Rule (GAAR) and the principal purpose test under the Multilateral Instrument (MLI). These conditions do not apply to Gift City, making it more appealing compared to Singapore or Mauritius.”

 

The MLI refers to the Multilateral Convention to Implement Tax Treaty Related Provisions to Prevent Base Erosion and Profit Shifting. It establishes checks and standards to counter treaty abuse and facilitates dispute resolution.

 

Last year, FPIs domiciled in the Gift-IFSC and registered with the Securities and Exchange Board of India (Sebi) were permitted to issue ODIs. The recent budget announcements have extended the tax exemption on these instruments.

 

As per the Finance Bill, the amendments will take effect from April 1, 2026, and will be applicable for the assessment year 2026-27 onwards.

 

The value of outstanding stood at Rs 1.4 trillion in November. This was just 1.77 per cent of overall FPI assets under custody (AUC). In 2007, the share of P-notes in overall FPI AUC was over 40 per cent. However, with regulatory tightening and greater disclosure requirements have deemed the appeal of these instruments, once favoured by entities that wished to invest in India without registering onshore.

 

Derivative transactions booked by banks in the IFSC in December 2024 amounted to $40 billion. Several prominent fund entities, including Morgan Stanley, Lighthouse Canton, and Lightrock, are already registered in Gift City. According to data from the National Securities Depository Limited (NSDL), there are currently 91 FPIs registered in the Gift-IFSC.