Relocating an offshore fund

The tax relief under the 2025 Act

Section 70(1) of the Income-tax Act, 2025 takes two transfers out of the capital gains charge:

• clause (t): the transfer, in a relocation, of a capital asset by the original fund to the resultant fund; and
• clause (u): the transfer by a shareholder, unit holder or interest holder, in a relocation, of its interest in the original fund in exchange for an interest in the resultant fund.

The definitions are in the Table in section 70(2) (Sl. No. 5):

• Original fund. A fund established outside India that is not resident in India; is resident in a treaty country or territory, or established in a notified one; is subject to investor protection regulation there; and meets any prescribed conditions. Certain wholly owned investment vehicles of the Abu Dhabi Investment Authority and notified funds also qualify.
• Relocation. A transfer of the original fund's assets, or those of its wholly owned special purpose vehicle, to the resultant fund on or before 31 March 2030. The consideration must be units or interests in the resultant fund, issued to the original fund's investors in the same proportion as their holdings, or to the original fund itself in that proportion.
• Resultant fund. A trust, company or LLP located in an IFSC that holds a certificate of registration as a Category I, II or III AIF, or a certificate as a retail scheme or ETF meeting the Schedule VI conditions, and is regulated under the IFSCA fund management regulations.

Schedule VI (Sl. No. 10) adds an exemption for capital gains of a non-resident or specified fund on shares of an Indian company that the resultant fund later sells. It applies where the shares came across in the relocation and the gains would not have been taxable had the relocation not taken place. See tax for non-resident investors.

The regulatory side

• Manager. Register an FME in the category the destination scheme needs, or use an existing one. See FME categories.
• Destination scheme. File the scheme as a venture capital or restricted scheme (taken on record as a Category I, II or III AIF), or as a retail scheme or ETF, so that it meets the resultant fund definition.
• No FME contribution. The FME's usual minimum contribution to the scheme does not apply to schemes relocated to the IFSC from outside India (regulations 28, 40 and 52).
• Investors. Every investor in the IFSC scheme must still be eligible: accredited, or above the scheme's minimum ticket. The investor numbers must fit the scheme type. Check this before choosing the destination scheme.
• Exchange control. The IFSC fund is a person resident outside India for FEMA purposes, so the transfer is offshore to offshore. Any Indian portfolio it inherits will still need the right inbound route, for example registration as a foreign portfolio investor.

Order of steps

1. Confirm that the existing fund meets the original fund conditions, and map its investors, assets and any special purpose vehicles.
2. Register or appoint the FME and file the IFSC scheme.
3. Obtain investor consents and approvals under the fund documents, and any regulatory consents in the origin jurisdiction.
4. Transfer the assets to the resultant fund for units issued in exact proportion to existing holdings.
5. Wind up or continue the original fund as its home law permits, and complete the origin jurisdiction's exit and tax steps.
6. Keep the evidence: valuations, registers before and after, and the consideration paid, to support the claim under section 70.

Pitfalls

• The 2030 deadline applies to the transfer of assets, not to the start of the project. Origin-country approvals can take longer than the IFSC steps.
• Proportionality. Cash alternatives, side pockets or new money mixed into the exchange can take the transaction outside the definition.
• Prescribed conditions. The original fund must also meet any conditions prescribed under the Act. Check the current rules.
• Home-country tax. Indian relief does not settle the investors' or the original fund's position in the origin jurisdiction.
• Indian businesses are different. Moving an Indian business into the IFSC raises the section 147(5) splitting-up test, not these rules. See relocating a business or fund.