Tax and the LRS Route — What Applies to a Resident Investor
This lesson separates the tax holiday of a unit set up in the GIFT IFSC from the tax position of a resident who invests through it, and sets out the remittance limit and the tax collected at source on money sent there.
Two different taxpayers
When a resident places money with a banking unit or a fund in the IFSC, two taxpayers are involved: the IFSC unit, which earns business income, and the resident, who earns interest, income or gains on the money placed.
The Income-tax Act, 2025 (section 147) gives units set up in the IFSC a deduction of their specified business income for a block of years, in effect a long tax holiday. The deduction belongs to the unit. It does not pass to a resident individual who invests or deposits through that unit.
How the resident is taxed
A resident individual (strictly, one who is resident and ordinarily resident) is taxed in India on worldwide income. Interest, income and gains from IFSC products are therefore taxable in the resident's hands under the normal rules. Interest on a foreign-currency deposit with an IFSC banking unit, for example, is added to the individual's income and taxed at the applicable slab rate.
Such income is not tax-free, and the tax does not wait until the money is brought back to India.
The LRS limit
Money reaches the IFSC under RBI's Liberalised Remittance Scheme (LRS). A resident individual may remit up to USD 250,000 in a financial year (as at October 2026), all permitted remittances taken together, and PAN is mandatory. Money sent to the GIFT IFSC shares that limit.
Tax collected at source
When LRS remittances in a financial year cross a combined ₹10 lakh, tax collected at source (TCS) applies to the amount above that threshold. For investments the rate is 20% (rates as of October 2026).
TCS is not an extra tax. It is credited against the remitter's income-tax liability for the year, or refunded if it exceeds that liability. It does tie up cash until the credit or refund comes through.
Rules at a glance
Whose tax holiday is it?
Meenal, 52, a resident who runs a pharmacy in Vadodara, holds a foreign-currency deposit with an IFSC banking unit. Having read that IFSC units enjoy a tax holiday, she plans to leave the interest in the account.
The tax holiday covers the banking unit's own specified business income. Meenal's interest is her income: it is added to her total income in India and taxed at her slab rate under the normal rules, whether or not she brings the money back.
TCS on a remittance to the IFSC
- Rohan, a resident, remits ₹16,00,000 in one financial year for investment in the GIFT IFSC, and makes no other LRS remittance that year.
- No TCS applies to the first ₹10,00,000. The amount above the threshold is ₹16,00,000 − ₹10,00,000 = ₹6,00,000.
- TCS at 20% (rate as of October 2026) on ₹6,00,000 = 0.20 × 6,00,000 = ₹1,20,000.
Result. TCS of ₹1,20,000 is collected. It counts as tax already paid by Rohan and is set off against his income-tax liability for the year, or refunded if it exceeds that liability.
Key points
- The long tax holiday covers the IFSC unit's own specified business income; it does not pass to a resident who invests or deposits through that unit.
- A resident individual is taxed in India on worldwide income, so income and gains from IFSC products are taxable under the normal rules, without waiting for the money to be brought back.
- The LRS limit is USD 250,000 per resident individual per financial year (as at October 2026); PAN is mandatory.
- LRS remittances above a combined ₹10 lakh in a financial year attract TCS, which is credited against the remitter's income-tax liability or refunded.
Common misunderstandings
- The IFSC tax holiday is not the investor's: it covers only the unit's specified business income.
- TCS at 20% is not charged on the whole remittance: it applies only to the amount above the combined ₹10 lakh threshold.
- TCS is not an additional tax: it is credited against the remitter's income-tax liability, or refunded.
Questions people ask
Is interest on a deposit with an IFSC banking unit tax-free for a resident?
No. It is added to the resident's income and taxed in India at the applicable slab rate.
How are gains on IFSC fund units taxed for a resident?
They are taxable in India under the normal rules for residents; the detail depends on the asset and on the law in force for that year.
Does money sent to the IFSC have its own LRS limit?
No. It shares the USD 250,000 annual limit with all other permitted remittances.
What this lesson relies on
- Income-tax Act, 2025 — section 147 (deduction for units in an International Financial Services Centre)
- Income-tax Act, 2025 — tax collected at source on remittances under the Liberalised Remittance Scheme (rates as of October 2026)
- RBI — Liberalised Remittance Scheme (RBI FAQ on LRS)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.