Some AIFs in GIFT City get tax notices despite exemption, raising concerns

Notices issued over surcharges 'due' on dividends and interest income

Investment funds set up in India’s emerging international financial hub Gujarat International Finance Tec-City (GIFT City) have received a handful of tax notices over recent months.

 

The notices are over surcharges purportedly due on dividends and interest income that Category III Alternative Investment Funds (AIFs) have received, according to three people familiar with the matter.

 

The notices are for assessment years 2024-25 and 2025-26 and are apparently not in sync with existing tax norms on surcharge applicable to such funds, said tax experts.

 

Domestic category III AIFs pay a surcharge of 10-15 per cent on dividend income and 10-37 per cent on interest income, while there is no such surcharge applicable on specified funds-category III AIFs located at GIFT City.  They are liable to pay only a flat 10 per cent tax on income from securities such as dividends and interest.

 

The flat 10 per cent rate on interest and dividend income from securities for these funds was introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, effective from FY21 or the 2021-22 assessment year.

 

Tax returns are generally filed in the assessment year that follows the financial year in which the income was earned.

 

The surcharge exemption on that 10 per cent tax was introduced in Finance Act, 2023, applicable from FY24 or 2024-25 assessment year.

 

The notices gain significance in light of recent traction for AIFs located in the jurisdiction. Category III AIFs have raised over $21.4 billion in commitments as of March 2026, shows data from the International Financial Services Centres Authority (IFSCA) bulletins. They have invested over a third of the committed capital.

 

 “Cat III AIFs in GIFT City are charged a flat rate of 10% on dividend and interest and any recovery of surcharge and cess is erroneous. Normally such cases should get resolved by seeking a rectification of the demand since it is likely a system issue. However, if this does not get resolved by filing a rectification, the GIFT City fund might have to undergo the process of filing an appeal to the CIT(A),” said Rajesh H. Gandhi, partner, Deloitte India.

 

The Commissioner of Income Tax (Appeals) or CIT (A) is the first forum for appeal against action by the income tax department.

 

Tushar Sachade, partner at Price Waterhouse & Co LLP said that funds are talking with the IFSCA authorities and tax department on the same.

 

“Discussions are ongoing,” he said. Pranay Bhatia, founder and managing partner of EFFIINEXT Advisory said that tax notices have seen an increase this year in respect of GIFT City Funds as well as other institutions.

 

Many of these are likely to be automated notices sent on account of system errors or contain standard questions that may or may not be relevant to the taxpayers’ structure and circumstances. Such issues could be resolved after escalation to appellate authorities but can create a sense of uncertainty in the interim period, according to Bhatia.  

 

“At the end of the day, tax is a complex subject involving interpretation and dynamic outcomes, which could lead to anxiety among investors,” he said.There are 228 Category III AIFs in GIFT City as of March 2026.

 

There were only 14 as of March 2022-the earliest available figure in regulatory annual reports. The committed capital mentioned in 2022 was around $1 billion.  

 

Emails sent to the IFSCA and the Central Board of Direct Taxes on September 1 did not receive a reply. 

The lay of the land 

• Some Category III AIFs in GIFT City face tax notices
• Dispute is around taxation of dividend, interest income
• Finance Act 2023 introduced surcharge exemption on 10 per cent tax
• Experts say relief possible in appeal process