In a significant development, the government has granted a capital gains tax exemption to units of investment trusts and ETFs issued by entities based in GIFT City or traded on exchanges within the city. This exemption, as notified by the Central Board of Direct Taxes (CBDT), applies to units of investment trusts, units of schemes, and units of ETFs launched under the International Financial Services Centres Authority (Fund Management) Regulations of 2022.
Impact on GIFT City
Gujarat International Finance Tec-City (GIFT City) is an ambitious project taking shape in the Gandhinagar district of Gujarat, India. It stands as India’s pioneering operational greenfield smart city and international financial services centre, enthusiastically championed as a greenfield initiative by the Government of Gujarat.
GIFT City, currently enjoys exemptions from capital gains tax on various securities traded on its stock exchanges or issued by entities established within its boundaries. The introduction of a new fund regime, with the setup of investment trusts, necessitated the inclusion of units issued by these trusts in the list of securities eligible for capital gains tax exemption.
Impact on ETFs
Exchange-Traded Funds (ETFs) are a type of investment fund and exchange-traded product, with shares that trade on stock exchanges similar to individual stocks. ETFs are designed to provide investors with exposure to a diversified portfolio of assets, such as stocks, bonds, commodities, or other financial instruments. They offer several advantages, including liquidity, transparency, and typically lower expense ratios compared to traditional mutual funds. ETF investors can buy and sell shares throughout the trading day at market prices, making them a flexible and efficient way to gain exposure to various asset classes and investment strategies.
ETFs have emerged as a prominent force in the Indian financial markets, reshaping the investment landscape and offering both retail and institutional investors a diversified and cost-effective means to access various asset classes.
This change means that ETFs listed and traded on the stock exchanges within GIFT City will now benefit from capital gains tax exemption as well. These amendments expand the range of incentives available for funds and stock market trading within the International Financial Services Centre (IFSC).
How this strategic move can benefit everyone?
Anticipated outcomes from this move include a boost in the establishment of Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InVITs), and the encouraging launch of ETFs within the International Financial Services Centre (IFSC). As a result, it is expected to create favourable conditions for the future growth of listed Alternative Investment Funds (AIFs) once the listing platform becomes operational.
The newly introduced provisions extend these benefits to a variety of securities, including units of Investment Trusts, units of Schemes, and units of ETFs. When we refer to “units of a scheme,” we are essentially talking about the portions of a mutual fund or investment scheme that investors purchase. These units represent ownership in the overall scheme or fund, and their value fluctuates based on the performance of the underlying assets. Investors can buy or redeem these units at the scheme’s net asset value (NAV), which is calculated by subtracting the scheme’s liabilities from its total asset value.
On the other hand, “units of investment trusts” denote the ownership interests or shares held by investors in an investment trust. These trusts function similarly to mutual funds, pooling the funds of multiple investors to create a diversified portfolio of assets, such as stocks, bonds, real estate, and other securities.
These government initiatives have been met with enthusiasm and are expected to enhance global competitiveness, while making GIFT City a tax-neutral enclave for the financial sector, particularly attracting non-resident investors seeking opportunities within the financial sector.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.