GIFT City funds or direct overseas investing? Experts explain the costs, tax rules and risks investors should know

GIFT City funds and direct overseas investing offer Indian investors access to global markets, but differ in costs, taxation and control. Shweta Rajani of Anand Rathi Wealth explains how to choose between the two routes and what investors should know about TCS.

Indian investors looking to diversify beyond domestic markets can gain exposure to overseas stocks through two routes. They can invest through funds set up in Gujarat International Finance Tec-City (GIFT City) or buy foreign shares and exchange-traded funds (ETFs) directly through an overseas brokerage account.

While both routes offer access to international markets, they differ in investment management, costs, tax treatment and the level of control investors have over their portfolios.

GIFT City funds may suit investors who want international exposure without selecting individual stocks. Direct overseas investing, on the other hand, allows investors to build their own portfolios of foreign stocks and ETFs, but requires them to manage investment decisions, transactions and tax compliance.

Shweta Rajani, associate director at Anand Rathi Wealth, explains the key differences between the two routes and what investors should consider before investing overseas.

GIFT City funds are regulated by the International Financial Services Centres Authority (IFSCA). Depending on the scheme, investors can access overseas markets through a fund that selects stocks, ETFs or other assets. Applicable rules for open-ended retail schemes include daily net asset value (NAV) publication, quarterly portfolio disclosures and the appointment of a custodian.

Direct overseas investing involves opening an account with an overseas brokerage platform and purchasing foreign shares or ETFs. Investors decide when to buy, sell or rebalance their holdings, but must also track transactions, calculate capital gains and meet applicable Indian tax-reporting requirements.

Investors who want global exposure without researching individual companies may find GIFT City funds more convenient. Those who want to build a portfolio around specific US companies or global ETFs may prefer direct investing, provided they are comfortable managing the additional compliance.

Both routes generally fall under the Reserve Bank of India's Liberalised Remittance Scheme (LRS), which allows resident individuals to remit up to $250,000 per financial year for permitted transactions. GIFT City investments that qualify as overseas investments under the applicable FEMA framework also count towards this limit.

GIFT City funds charge management and operating expenses, and some schemes may levy exit loads. Direct investing avoids fund management fees but can involve brokerage, platform charges, currency conversion mark-ups and bank remittance fees.

Tax collection at source (TCS) can also affect the amount investors need to set aside. Under the applicable rules, LRS remittances for purposes other than education or medical treatment attract 20% TCS on the amount exceeding ₹10 lakh in a financial year.

For example, a ₹50 lakh remittance would attract ₹8 lakh in TCS. This amount can generally be adjusted against the investor's tax liability or claimed as a refund, subject to applicable rules. It is not an additional investment expense, but it can temporarily tie up funds.

Investors should compare the total cost of the investment rather than focus on a single charge. Fund expenses, brokerage, currency conversion and the time and effort required to manage tax compliance can all affect the overall experience.

For foreign shares, short-term capital gains on holdings of up to 24 months are generally taxed at the investor's applicable income-tax slab rate. Gains on shares held for more than 24 months are generally taxed at 12.5% without indexation, plus applicable surcharge and cess. The ₹1.25 lakh exemption available for certain long-term gains on specified Indian-listed securities does not apply to gains on foreign shares.

Dividends from overseas investments are generally taxable in India at the applicable slab rate. The foreign country may also deduct withholding tax before paying the dividend. Eligible investors can claim credit for foreign taxes paid, subject to applicable rules, including filing Form 67 where required.

The tax treatment of GIFT City funds depends on their legal structure and the applicable tax provisions. In the retail fund structure described by Rajani, the fund pays tax on its investments, with the tax reflected in its NAV. Investors should check the specific scheme's structure and tax treatment rather than assume that all GIFT City funds follow the same rules.

Rajani suggests that investors with portfolios exceeding ₹5 crore could consider allocating around 5-10% to global assets, depending on their circumstances. For a ₹10 crore portfolio, this would mean an allocation of ₹50 lakh to ₹1 crore to international investments, such as US technology companies or global index funds.

However, this is a broad portfolio allocation guideline, not a recommendation for every investor. International exposure should complement, rather than replace, a diversified domestic portfolio. Investors should continue to build their core holdings through diversified domestic equity mutual funds across categories and market capitalisations to participate in India's long-term growth, Rajani said.

Ultimately, GIFT City funds may be better suited to investors who value professional management and convenience, while direct overseas investing may appeal to those who want greater control over stock selection. In either case, investors should compare the costs, tax implications, currency risks and investment strategy before committing money.