Govt exempts ETFs from capital gains at GIFT

The Central Board of Direct Taxes (CBDT) issued a notification on Tuesday exempting stock exchanges and securities within the GIFT IFSC in Gandhinagar from capital gains tax, which is a significant development for investors. This decision provides significant relief to investors because it means that any unit associated with an investment trust, scheme, or exchange-traded fund (ETF) launched under the International Financial Services Authority (IFSC) Fund Management Regulations is now tax-free.

The Gujarat International Finance Tec-City (GIFT)-IFSC is being promoted as a tax-free financial enclave.

This exemption, according to industry participants, will allow exchanges and funds operating within the GIFT-IFSC to offer more appealing incentives to investors.

“These relaxations will enable funds, investment trusts, and exchange-traded funds (ETFs) in GIFT-IFSC to offer lucrative incentives and investment opportunities to investors. Such incentives are likely to pique the interest of both Indian and foreign investors at a time when the government envisions the IFSC as a thriving offshore investment hub. IFSCs in Dubai and Singapore offer similar incentives, and the CBDT’s decision will boost GIFT-IFSC’s competitiveness among non-resident investors,” a tax expert stated.

The law currently exempts from capital gains tax a variety of securities that trade on GIFT City stock exchanges or are issued by entities incorporated in GIFT City.

Because the new fund regime requires funds to be established as investment trusts, the law required the inclusion of units issued by such trusts for the purpose of capital gains exemption. Similarly, ETFs listed and traded on GIFT City stock exchanges will now be exempt from capital gains tax.

The move is intended to make the IFSC a global financial services hub and to encourage non-resident investors to invest on a recognised stock exchange.

To qualify for this exemption, the consideration for the transaction must be paid or payable in foreign currency. The securities added by the new notification are (i) an investment trust unit, (ii) a scheme unit, and (iii) an exchange-traded fund unit.