Tax notices seeking surcharge on dividend and interest income have unsettled Category III AIFs in GIFT City, with specialists attributing the demands to possible system errors.
Some Category III alternative investment funds in GIFT City have received income tax notices seeking surcharge on dividend and interest earnings, even though the funds are understood to be exempt from that levy, according to people familiar with the matter. The notices relate to assessment years 2024-25 and 2025-26 and appear at odds with the tax framework currently applied to specified funds in the Gujarat financial hub.
Under existing rules, Category III AIFs set up in GIFT City are meant to pay a flat 10% tax on dividend and interest income from securities, without surcharge, after changes introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. The surcharge exemption on that 10% rate was later added by the Finance Act, 2023, taking effect from FY24, which maps to assessment year 2024-25.
Tax specialists said the notices may be the product of system errors rather than a policy shift. Rajesh H. Gandhi, a partner at Deloitte India, told Business Standard that any demand for surcharge and cess on such income would be incorrect for GIFT City Category III AIFs and should normally be fixed through a rectification request. If that does not work, he said, the fund may have to appeal to the Commissioner of Income Tax (Appeals), the first appellate forum in income tax disputes. Tushar Sachade, a partner at Price Waterhouse & Co LLP, said discussions were under way with the International Financial Services Centres Authority and tax officials. Pranay Bhatia, founder and managing partner of EFFIINEXT Advisory, said notices of this sort have become more common this year and can create uncertainty even when they are ultimately resolved.
The issue lands at a sensitive moment for the sector. Data cited from IFSCA bulletins show that Category III AIFs in GIFT City had raised more than $21.4 billion in commitments by March 2026, with more than a third of that capital already deployed. The number of such funds has climbed sharply as well, from 14 in March 2022 to 228 by March 2026. Business Standard said emails sent to the IFSCA and the Central Board of Direct Taxes on September 1 went unanswered.
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