Master-Feeder Structures with a GIFT City Feeder Fund

A master-feeder structure lets one portfolio serve investors who cannot, or should not, invest through the same vehicle. The feeder collects their money and invests it in a master fund, which holds and trades the portfolio. A GIFT City feeder is often the most practical route for unlisted Indian companies and LLPs into an overseas strategy, because they can subscribe to IFSC funds as overseas portfolio investment but have no general permission to subscribe cash to an overseas fund. It settles neither the tax at each level nor where the master should sit.

This insight explains how a GIFT City feeder fund works, who can invest through it, how the feeder’s regulatory category drives its tax, and what to check about an overseas master, for example one in Abu Dhabi Global Market (ADGM).

How a master-feeder structure works

Several feeders can sit above one master. Each serves an investor group: non-residents through one vehicle, Indian family companies through a GIFT feeder, and so on. The master pools their capital and runs the strategy. Fees, reporting and liquidity terms can differ by feeder, but the portfolio is managed once.

On the GIFT side, the IFSCA (Fund Management) Regulations 2025 (“FM Regulations”) recognise a “fund of funds scheme”, one that “invests in other schemes whether in IFSC or India or foreign jurisdictions” apart from what it holds for expenses (Reg. 2(1)(p)) [1]. A restricted scheme (filed with IFSCA as a Category I, II or III AIF) may invest in “units of other investment schemes subject to appropriate disclosure in the placement memorandum” (Reg. 34(1)(f)) [1].

The manager contribution otherwise required of a restricted scheme is exempted for a fund of funds. Since 10 September 2026 the exemption applies only where the fund invests in “scheme(s) with similar requirements, wherein the scheme in IFSC does not involve active management by the FME” and the inter-se allocation is disclosed in the placement memorandum (Reg. 40(4)(c)) [1]. Before that date the text required only a fund of funds investing in schemes with similar requirements. Whether a particular master has “similar requirements” needs confirming before the feeder’s terms are fixed.

Why a manager uses a GIFT City feeder fund

The main reason is access. Unlisted Indian companies and LLPs have a route into an IFSC fund that they do not have into most funds abroad.

Under the Overseas Investment Rules 2022 (“OI Rules”), “a person resident in India may make contribution to an investment fund or vehicle set up in an IFSC as OPI” (Schedule V, para 1(2)(iii)) [2]. RBI’s Directions confirm that “in addition to listed Indian companies and resident individuals, unlisted Indian entities also may make such investment in IFSC” (OI Directions, para 24(1)) [3]. Outside IFSCs, an unlisted Indian entity has no general permission to subscribe cash to an overseas fund [4].

For an overseas strategy that wants Indian corporate money, a GIFT feeder can therefore solve a problem that a direct subscription to a foreign master cannot.

The feeder’s own investment into the master may also sit outside the OI Rules. They do not apply to “any investment made outside India by a financial institution in an IFSC” (rule 4(a)) [2]. The IFSCA Act 2019 defines “financial institution” as “a unit set up in an International Financial Services Centre and which is engaged in rendering financial services” (s. 3(1)(c)) [15]. The fund management entity is the clearer fit. Whether the feeder scheme itself is a “financial institution” is not confirmed, so the feeder-to-master leg should not be structured on that exclusion until it is. The Indian investor’s leg into the feeder is what FEMA tests.

Who can invest in the GIFT feeder

FEMA attaches to the person who signs the subscription and owns the units. Each subscriber’s residence is established separately under FEMA and under the Income-tax Act; they are separate tests.

Three practical points for individuals:

• No extra allowance. RBI lets banks facilitate remittances to IFSCs “for all permissible purposes under LRS” (para 11). A GIFT feeder still uses the individual’s LRS limit [5].
• No pooling of family limits for an investment unless the members are “co-owners/co-partners” (para 4) [5].
• Tax collected at source. For LRS remittances “exceeding ten lakh rupees”, the bank collects 20% where the purpose is not education or medical treatment (s. 394(1), Table, Sl. 7, Income-tax Act 2025) [6]. The Income Tax Department’s TCS Rates page states 20% “of amount remitted in excess of Rs. 10 lakh” for those purposes. The s. 394 Table wording does not itself say “in excess”. Exceptions are in s. 394(4)-(5) [16].

For entities, an investor other than a resident individual must report the investment “within sixty days from the end of the half-year in which such investment or transfer is made as of September or March-end” (reg. 10(3), Overseas Investment Regulations 2022) [7]. The bank must also be satisfied of the “bona fides of the transaction, compliance with FEMA provisions”, KYC and anti-money-laundering rules (OI Directions, para 27(4)) [3]. The bank’s document pack is typically agreed before a payment date is fixed. The cross-border routes are covered more widely on the FEMA advisory page.

The feeder’s category decides its tax

Moving the portfolio into an overseas master does not settle the feeder’s Indian tax. Under the FM Regulations, the category follows the strategy, and the tax follows the category.

Category III for trading strategies. A restricted scheme for “diverse or complex trading strategies including investment in listed or unlisted derivatives” must be filed as Category III (Reg. 30(1)(b)) [1]. Category I and II restricted schemes “shall be filed before the Authority as a close-ended scheme”; only Category III may be open-ended (Reg. 30(2)) [1]. An open-ended hedge-fund feeder is therefore Category III.

Category I and II pass-through. Section 224 of the Income-tax Act 2025 taxes the unit holders of Category I and II funds “in the same manner as if” they had made the fund’s investments directly (s. 224(1)) [8]. Business losses stay in the fund (s. 224(2)(a)). Income credited to investors is deemed received on the last day of the tax year even if no cash is paid (s. 224(7)) [8]. For a close-ended feeder that genuinely fits Category II, the investor is taxed as if it held what the feeder holds: units of the master. The master’s own tax position and the character of its income therefore matter. For an IFSC fund this is conditional. Section 224(10)(a), Schedule VI Note 1(g)(i) (even as amended by Finance Act 2026), s. 70(2) and Schedule V still refer to the repealed IFSCA (Fund Management) Regulations, 2022 [8][9][11][17]. The result rests on Reg. 148(4) of the 2025 Regulations, which deems those references to be to the corresponding 2025 provisions [1]. It is not confirmed by CBDT.

Category III with resident investors. A Category III fund in GIFT can be a “specified fund”, with exemptions and a 10% rate on income in respect of securities (s. 210(1), Table Sl. 1(b), limited by s. 210(2) to income attributable to non-resident unit holders) [14], but only if all units other than those of the sponsor or manager are held by non-residents. The only exception is a non-resident who later becomes resident, within a 5% cap (Schedule VI, Note 1(g), as amended by Finance Act 2026, s. 125, from 1 April 2026) [9]. If any resident other than the sponsor or manager subscribes, the feeder loses specified-fund status and has no special regime. Its tax then depends on its legal form (trust, company or LLP) and the character of its income. Placing a taxable feeder above an exempt master does not by itself produce tax efficiency. The 2022 cross-reference condition above applies to specified-fund status too.

This is analysis, not a stated rule: if the trading gains arise in the master and the feeder holds only master units, the feeder’s taxable events may be limited to distributions and redemptions. That is one reason managers use the design. Whether it works for a given feeder needs a written tax opinion.

Residents stay taxable on worldwide income. A resident’s total income includes income that “accrues or arises to such person outside India”, with a carve-out for those “not ordinarily resident” (s. 5(1)(c), Income-tax Act 2025) [10]. Investing through an IFSC does not take that income out of Indian tax.

Where to domicile the master

The master’s location is a separate decision from the feeder’s. The investors and the portfolio are the usual starting points, not the jurisdiction.

• Investor mix. A master that takes only non-residents and invests outside India faces different Indian questions from one that invests back into India.
• Strategy and liquidity. Open-ended trading strategies, close-ended private funds and arbitrage strategies in Indian securities each raise different category and tax points at feeder level.
• Tax certainty at master level. A written basis, not a marketing summary, is what matters for how the master’s income is taxed where it sits and, if it invests in India, how Indian tax applies at source.
• Regulatory status. The master’s regulator, its fund category and the manager’s licence, because the GIFT feeder’s documents will refer to them.

Where the master invests back into India, the two legs are assessed together. The OI Rules’ two-layer limit (rule 19(3)) applies to overseas direct investment “financial commitment”, not to OPI in fund units [2]. The master’s India investments come under the FPI or FDI rules, including the FPI constituent rules for resident individuals. Tax anti-avoidance provisions may also apply (not analysed here). A GIFT feeder is not a route to bring resident money back into India without meeting those rules.

A GIFT master is also possible. For a strategy whose investors are all non-resident, a GIFT Category III fund may qualify as a specified fund (Schedule VI) [9]. Once Indian residents need to come in, the feeder-and-master split is often what keeps the master’s tax position intact.

The relocation relief runs only one way. The tax-neutral “relocation” in s. 70 of the Income-tax Act 2025 covers transfers from a qualifying “original fund” outside India to a “resultant fund” in an IFSC, on or before 31 March 2030 (s. 70(1)(t)–(u) and (2)) [11]. A move from GIFT to another centre is not within it, so every step (transfer of assets, redemption, issue of new units) needs testing for tax at each level.

An ADGM master: what to check

ADGM is a regulated base for funds, but incorporation there does not by itself exempt a fund from UAE tax. Under UAE Cabinet Resolution No. 34 of 2025 on Qualifying Investment Funds and Qualifying Limited Partnerships (27 March 2025, applying to tax periods from 1 January 2025), an investment fund must meet stated conditions “to apply to the Authority for exemption from Corporate Tax”. Among them, its primary business must be investment business, and investors “shall not control the daily management” of the fund (Art. 2(1)(a)–(b); Art. 9) [12].

Points commonly requested:

1. evidence of the master’s regulatory status and fund category;
2. its corporate tax position, including any exemption from the Federal Tax Authority;
3. who bears the cost if an exemption is lost or a tax adjustment arises;
4. where the master invests back into India, its route into Indian securities and the Indian tax at source.

None of this follows from UAE domicile alone. A structure built for US equities would not simply carry over to an India arbitrage strategy without fresh work. The wider options are set out on the ADGM structures page and in the comparison of ADGM, DIFC and GIFT City structures.

A recent example

Business Standard reported on 20 October 2026 that Artha Bharat Investment Managers IFSC, a fund management entity in GIFT City, “is relocating two of its funds to Abu Dhabi Global Market (ADGM), citing tax uncertainty and compliance burden”. The report describes the first as the master fund of a fund that invests primarily in the US consumer theme and is open only to non-resident Indians, and the second as an arbitrage fund investing in Indian securities. It adds that a new ADGM fund is being set up, to which investors in the current funds may shift [13]. We express no view on any matter between the manager and the tax authorities. Decisions on where a master or feeder sits generally turn on the investor mix, the strategy and the fund’s category, as discussed above.

Feeder-master terms that need scrutiny

The commercial terms between the two vehicles cause as many problems as the law.

• Liquidity. If the feeder allows exits more often than the master, it can face a mismatch. Dealing days, notice periods and gates are typically aligned.
• Valuation. Valuation dates and pricing policies are matched, and the documents say which NAV the feeder uses.
• Fees. Total fees across both levels are shown, and the documents say whether the master charges the feeder.
• Tax reserves. In an open-ended feeder, the documents decide who bears a later tax cost after investors have redeemed: reserves, indemnities and allocation rules.
• Rights. The feeder’s voting and information rights in the master are set out, together with what happens if the master suspends redemptions.

Points commonly checked before launch

1. Investors by type and residence, and the FEMA route for each.
2. The feeder’s category, from its strategy and open- or close-ended terms (Reg. 30) [1].
3. A written tax analysis for subscription, income and exit at feeder and master level.
4. The master’s regulatory and tax status, in writing.
5. The bank’s document pack for Indian subscribers.
6. Reporting calendar: OI reporting for entity investors, LRS and TCS records for individuals.

The GIFT side of these structures is covered in GIFT City for foreign investors, and where to set up the fund manager is a separate decision.

Common questions

What is a master-feeder structure?

A feeder fund collects investors’ money and invests it in a master fund, which holds the portfolio. Several feeders can serve different investor groups on the same strategy.

Can an unlisted Indian company invest in a GIFT City feeder fund?

Yes, as overseas portfolio investment. RBI’s Directions allow unlisted Indian entities to invest in IFSC funds, within the 50% of net worth limit (OI Directions, para 24(1); OI Rules, Sch. II, para 1(1)) [2][3].

Can a GIFT City feeder be Category II?

Only if it is close-ended and its strategy fits Category II. Category I and II restricted schemes must be close-ended; only Category III may be open-ended (Reg. 30(2)) [1].

Does a GIFT feeder give individuals a higher LRS limit?

No. Investment in a GIFT fund uses the individual’s USD 250,000 LRS limit (LRS Master Direction, paras 1, 7 and 11) [5].

Is a move from GIFT City to an overseas master tax-neutral?

Not under s. 70, which covers relocation into an IFSC, not out of it (s. 70(1)(t)–(u)) [11]. Each step needs its own tax analysis.

Does an ADGM fund automatically get UAE tax exemption?

No. A qualifying investment fund must meet conditions and apply for exemption (Cabinet Resolution No. 34 of 2025, Art. 2 and Art. 9) [12].

Sources

1. IFSCA (Fund Management) Regulations, 2025, as amended up to 10 September 2026 (consolidated), Regs. 2(1)(p), 30, 34, 40, 148. IFSCA, 14 Sep 2026. ifsca.gov.in
2. Foreign Exchange Management (Overseas Investment) Rules, 2022 (G.S.R. 646(E)), rules 2, 4 and 19, Schedules I–V. Ministry of Finance (DEA), 22 Aug 2022; hosted by RBI. rbi.org.in
3. Master Direction – Overseas Investment, paras 24(1), 27(4) (para 24(1) as substituted by A.P. (DIR Series) Circular No. 09, RBI/2024-25/41, 7 Jun 2024). RBI, updated 1 Apr 2026. rbi.org.in
4. Foreign Exchange Management (Overseas Investment) Directions, 2022 – Investments in Overseas Funds (A.P. (DIR Series) Circular No. 09, RBI/2024-25/41). RBI, 7 Jun 2024. rbi.org.in
5. Master Direction – Liberalised Remittance Scheme, paras 1, 4, 7, 11. RBI, updated 6 Sep 2024. rbi.org.in
6. Income-tax Act, 2025 – Section 394. Income Tax Department. incometaxindia.gov.in
7. Foreign Exchange Management (Overseas Investment) Regulations, 2022 (FEMA 400/2022-RB), reg. 10(3). RBI, 22 Aug 2022. rbi.org.in
8. Income-tax Act, 2025 – Section 224. Income Tax Department. incometaxindia.gov.in
9. Income-tax Act, 2025 – Schedule VI (read with Finance Act, 2026, s. 125). Income Tax Department. incometaxindia.gov.in
10. Income-tax Act, 2025 – Section 5. Income Tax Department. incometaxindia.gov.in
11. Income-tax Act, 2025 – Section 70. Income Tax Department. incometaxindia.gov.in
12. Cabinet Resolution No. (34) of 2025 Regarding Qualifying Investment Funds and Qualifying Limited Partnerships. UAE Government, 27 Mar 2025. uaelegislation.gov.ae
13. “$800 million asset manager to shift 2 funds out of GIFT on tax issues”, Khushboo Tiwari. Business Standard, 20 Oct 2026. business-standard.com
14. Income-tax Act, 2025 – Section 210. Income Tax Department. Official URL not located
15. International Financial Services Centres Authority Act, 2019, s. 3(1)(c). Government of India. indiacode.nic.in
16. TCS Rates (LRS, Category 4, notes (a)-(b)). Income Tax Department, page uploaded 30 April 2026. incometaxindia.gov.in
17. Income-tax Act, 2025 – Schedule V. Income Tax Department. incometaxindia.gov.in

Related insights

• GIFT City for Foreign Investors – the GIFT vehicles and the conditional tax reliefs.
• Setting Up a Fund Manager in GIFT City, DIFC or ADGM – the manager’s own location, licence and tax.
• The UAE–India Corridor via GIFT City – how Gulf capital reaches India through GIFT.
• ADGM, DIFC and GIFT City Structures – choosing among the three centres by purpose.
• FEMA Advisory – the cross-border routes for Indian money.

Disclaimer: This article is general information, not tax or legal advice; rules change, so check the current position and take advice on your facts before acting.