GIFT City Category III AIF: The Route That Is Replacing Mauritius for F&O Traders

For decades, a foreign investor wanting to trade Indian equity derivatives ran the same route: set up an entity in Mauritius, obtain a Tax Residency Certificate, sign the India-Mauritius Double Taxation Avoidance Agreement, and let treaty protection handle the rest. That architecture is unwinding. The India-Mauritius DTAA was substantially amended in 2016, tightening source-based taxation of capital gains and stripping the treaty of much of its utility for short-term trading strategies. GIFT City — specifically the Category III Alternative Investment Fund route under the IFSCA (Fund Management) Regulations, 2022 — is now the most tax-efficient legal pathway for a foreign investor to access Indian Futures and Options on the NSE IFSC and India INX, within India’s legal perimeter, without treaty dependency. Whether GIFT City is unambiguously the better structure depends on a layer of GAAR analysis that much of the current commentary summarises but does not fully resolve.

Key Takeaways

• A Category III AIF registered with IFSCA in GIFT City can trade Indian Futures and Options on NSE IFSC and India INX with no Securities Transaction Tax and no capital gains tax during the 10-year IFSC tax holiday.
• The statutory tax exemption under Schedule IV of the Income-tax Act, 2025 means GAAR under Chapter X-A does not apply — the benefit is not treaty-derived and the GAAR test requires a tax benefit arising from an arrangement that misuses a treaty or provision.
• IFSCA requires genuine substance at the GIFT City level: a Fund Management Entity with registered presence, at least two Key Management Personnel, and investment decisions taken within the IFSC.
• Cumulative AIF commitments in GIFT City exceeded USD 12 billion by March 2026. Category III is the fastest-growing category, primarily on the strength of F&O and derivatives strategies.
• The Tiger Global litigation established that Indian courts apply substance-over-form analysis — judicial GAAR — independent of the statutory Chapter X-A framework. Funds with nominal IFSC presence and de facto portfolio management running from Singapore or Mumbai carry this risk.
• The India-Mauritius DTAA’s utility for derivatives strategies was always limited — derivatives income was never treaty-protected, and the 2016 amendments narrowed the residual capital gains protection. GIFT City removes the treaty dependency entirely.
• The FPI route through GIFT City (distinct from the AIF route) is available for operations below the AIF minimum corpus of USD 5 million.

What the Category III AIF Route Actually Looks Like

A foreign investor wishing to trade Indian equity derivatives through GIFT City goes through three registration layers. First, a Fund Management Entity is incorporated in the IFSC and registered with IFSCA as a Category III FME under the IFSCA (Fund Management) Regulations, 2022. Second, the AIF is constituted — either as a trust or an LLP — and registered with IFSCA. Third, the AIF obtains registration on NSE IFSC or India INX as an eligible participant for the relevant derivative contracts. The minimum corpus for a Category III AIF in GIFT City is USD 5 million.

The tax package is the attraction. During the IFSC tax holiday period — currently ten years from the date of commencement of the FME’s operations — the FME pays no income tax. The AIF’s income from trading specified securities (which includes equity derivatives on IFSC exchanges) is exempt during the holiday period. No STT applies to trades on NSE IFSC or India INX. GST is exempt on services provided by the FME to the AIF within the IFSC. Key Management Personnel must be resident or based in the IFSC, and investment decisions must be taken within the IFSC — a requirement that generates the most compliance friction in practice, as fund managers often prefer to retain portfolio management onshore or in Singapore while formally booking decisions in GIFT City.

Feature	Mauritius Route	GIFT City Category III AIF
Tax basis	Treaty-derived (DTAA)	Statutory (Schedule IV, IT Act 2025)
Derivatives income	Never DTAA-protected — taxed as business income	Exempt during 10-year holiday
GAAR risk	Chapter X-A + judicial GAAR (Tiger Global)	Chapter X-A inapplicable; judicial GAAR risk if substance thin
STT on trades	Applies (domestic exchange trades)	Zero (NSE IFSC / India INX)
Regulatory system	Mauritius FSC + Indian tax	IFSCA only — single regulator within India
Substance requirement	TRC + FSC substance + board meetings in Mauritius	FME + KMP + investment decisions in IFSC

The GAAR Question

Chapter X-A of the Income-tax Act, 2025 — the statutory GAAR framework — applies to an arrangement that is an impermissible avoidance arrangement: one that lacks commercial substance and is entered into primarily for a tax benefit. The critical point is that statutory GAAR under Chapter X-A requires the tax benefit to arise from an arrangement that misuses a treaty or a provision of the tax statute. A GIFT City AIF’s tax exemption arises from Schedule IV of the Income-tax Act, 2025 — a specific, Parliament-enacted exemption. It is not treaty-derived. The defensible position is that statutory GAAR cannot be invoked to deny a benefit that Parliament expressly granted.

Judicial GAAR is different. The Supreme Court’s reasoning in the Tiger Global proceedings applied substance-over-form analysis to a Mauritius-routed investment structure, establishing that Indian courts can look through arrangements that are formal in structure but lack genuine economic presence in the claimed jurisdiction. GIFT City funds with no real decision-making presence in the IFSC — with portfolio management de facto run from Singapore or Mumbai — carry a Tiger Global-style risk even where statutory GAAR does not technically apply. The substance requirement in the IFSCA regulations is not merely a filing requirement; it is the fund’s best defence against a judicial substance challenge.

What GIFT City Offers That Mauritius No Longer Does

The 2016 amendment to the India-Mauritius DTAA introduced a grandfathering cutoff and brought capital gains on Indian shares acquired after 1 April 2017 within India’s source-based taxation. For a derivatives-focused strategy — F&O positions are taxed as business income, not capital gains — the DTAA’s value for a trading fund was always limited. GIFT City removes the dependency on a treaty whose utility has narrowed, without requiring the fund to leave India’s legal and regulatory perimeter.

More practically: a Mauritius structure requires a TRC, minimum substance in Mauritius — staff, office, board meetings on the island — ongoing compliance with the Mauritius Financial Services Commission, FATCA/CRS reporting from a Mauritius-regulated entity, and ongoing management of the commercial substance test. A GIFT City FME operates under IFSCA’s supervision, with a compliance framework that Indian counsel and Indian auditors can manage without cross-border cost. The one area where Mauritius retains relevance is multi-asset, multi-jurisdiction strategies where the DTAA still protects specific categories of pre-2017 shareholdings. For pure India F&O strategies, that advantage does not arise.

The FPI Alternative

A non-resident investor whose trading operation falls below the AIF minimum corpus, or who does not want the FME overhead, can register as a Foreign Portfolio Investor with NSE IFSC directly. The FPI route under SEBI’s FPI Regulations allows GIFT City registration with lighter infrastructure requirements than an AIF-FME structure. The tax treatment is broadly similar for derivatives. The FPI route does not provide the leverage and strategy flexibility of a Category III AIF, but for a modest derivatives operation, it is a simpler path to the same exchange access.

The Ahmedabad Proximity Advantage

GIFT City sits on the Ahmedabad-Gandhinagar border. The IFSCA’s physical presence, the NSE IFSC and India INX exchanges, the licensed banking units, and the insurance entities are all within a 15-minute drive of Ahmedabad. Legal counsel advising on GIFT City fund structuring, IFSCA registration, or FME incorporation does not need to be Mumbai-based to serve this market. For fund managers considering the GIFT City route, proximity to local counsel with IFSCA regulatory knowledge reduces both cost and turnaround time on structuring questions.

Looking Ahead

Three developments will affect the Category III AIF framework over the next twelve months. IFSCA’s proposed consolidated fund management framework — expected to replace the 2022 Regulations — may tighten substance requirements further, specifically addressing what counts as investment decision-making within the IFSC. SEBI is evaluating whether to allow Category III AIFs in GIFT City to trade commodity derivatives in addition to equity F&O, which would expand the addressable market for IFSC-domiciled hedge strategies. And the JPC’s recommendation on trust-to-LLP conversion for single-scheme AIFs in the Corporate Laws (Amendment) Bill, 2026 will affect fund managers currently in trust format who want to restructure. For the analysis of that Bill, see Corporate Laws (Amendment) Bill 2026: JPC Report and Key Changes for Practitioners.

Frequently Asked Questions

Can a foreign investor trade Indian Nifty futures through GIFT City?
Yes. A non-resident investor can access Indian equity index futures and options on NSE IFSC and India INX through either a Category III AIF or an FPI registration in GIFT City IFSC. Income from these trades is exempt from Indian tax during the IFSC tax holiday. No STT applies to trades on IFSC exchanges.

Does GAAR apply to a GIFT City AIF?
Statutory GAAR under Chapter X-A of the Income-tax Act, 2025 is unlikely to apply because the GIFT City AIF’s tax exemption is a specific Parliament-enacted benefit under Schedule IV — not treaty-derived. Judicial GAAR remains a risk for funds without genuine substance at the IFSC level, following the Supreme Court’s reasoning in the Tiger Global line of cases.

What is the minimum corpus for a Category III AIF in GIFT City?
USD 5 million. The Fund Management Entity must be incorporated in the IFSC, registered with IFSCA, and maintain Key Management Personnel and investment decision-making within the IFSC.

Is GIFT City better than Mauritius for a fund that trades Indian derivatives?
For a pure India F&O or equity derivatives strategy, GIFT City is structurally better in 2026. The Mauritius DTAA’s capital gains protection does not apply to derivatives income. GIFT City’s statutory tax exemption is treaty-independent, operational costs are lower, and the compliance framework is Indian — reducing cross-border overhead.

What substance does IFSCA require for a GIFT City FME?
The FME must be incorporated in the IFSC, have at least two Key Management Personnel, maintain books and records in the IFSC, and conduct investment decision-making from within the IFSC. Outsourcing portfolio management to an entity outside the IFSC risks challenge under IFSCA’s substance tests and potentially under a judicial GAAR analysis.

What is judicial GAAR and how does it affect GIFT City structures?
Judicial GAAR refers to substance-over-form analysis applied by Indian courts independent of the statutory GAAR under Chapter X-A. The Supreme Court’s reasoning in the Tiger Global litigation established that courts can look through arrangements lacking genuine economic substance. A GIFT City fund with nominal IFSC presence and de facto portfolio management running from outside India carries this risk, even if the statutory GAAR test is technically not met.

Speak to Candour Legal’s Capital Markets and IFSC Team

Candour Legal advises fund managers, investors, and financial institutions on GIFT City AIF structuring, IFSCA registration, FME incorporation, GAAR analysis, FPI registration, and capital markets regulatory compliance. The firm’s Ahmedabad office is located minutes from GIFT City IFSC.

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+91 72288 88745 contact@candourlegal.com WhatsApp

About the author

Manasvi Thapar, Advocate at Candour Legal, advises on capital markets, IFSC regulatory matters, and commercial litigation. Schedule a call with Manasvi.

Candour Legal is a full-service Indian law firm with offices in Ahmedabad (adjacent to GIFT City), Mumbai, and New Delhi. More on our Capital Markets and IFSC practice.

Further reading

• India’s Data Centre Tax Holiday Till 2047: What the Finance Act 2026 Means for Investors and Operators
• Corporate Laws (Amendment) Bill 2026: JPC Report and Key Changes for Practitioners
• FIU-IND Registration in India: Who Needs It and Who Doesn’t