Routes to Investing Abroad — Indian Funds, LRS and GIFT IFSC
A resident can reach overseas markets through three routes: an Indian mutual fund scheme that invests abroad, direct investment under RBI's Liberalised Remittance Scheme, and products in the GIFT IFSC. This lesson explains how each works and where they differ.
Route 1: an Indian mutual fund scheme that invests overseas
The investor buys units in rupees through a mutual fund folio in India. The investor makes no remittance, so the Liberalised Remittance Scheme (LRS) limit is untouched; the scheme's own overseas investments fall under SEBI's limits for mutual funds.
Two features come with this route. The investor bears the scheme's costs, and in a fund-of-funds (FoF) these come on top of the costs of the underlying overseas fund. And when SEBI's overseas limits are reached, the scheme may stop taking fresh subscriptions.
Route 2: direct investment under LRS
Here the resident sends money abroad through a bank and buys foreign securities, such as listed overseas shares, in their own name. The remittance is made under LRS, within the limit of USD 250,000 per resident individual per financial year (as at October 2026), and PAN is mandatory.
Tax collected at source (TCS) applies to the part of LRS remittances above a combined ₹10 lakh in a financial year, at 20% for investments (rates as of October 2026). Foreign assets held directly in this way, and the income from them, must be reported in Schedule FA of the income-tax return.
Route 3: products in the GIFT IFSC
Products in the GIFT IFSC, such as fund schemes and foreign-currency accounts, are also funded by remittance under LRS. An IFSC unit is treated as a person resident outside India for exchange control, so the same LRS limit applies. Holdings are in foreign currency, and the income is taxable in India. TCS applies to a remittance to the IFSC in the same way as to other LRS remittances for investment. How IFSC holdings are reported in the tax return is not covered here.
What is the same and what differs
Every route carries market risk and currency risk in both directions. Paying in rupees through a mutual fund does not avoid currency risk, because the scheme's rupee NAV reflects the exchange rate.
The routes differ in cost, paperwork, tax treatment and limits. The mutual fund route has fund expenses, in two layers for a fund-of-funds, and SEBI's limits, but no remittance. The direct route involves a bank remittance, the LRS limit, TCS on larger remittances and Schedule FA reporting of the foreign holdings. The GIFT IFSC route involves the remittance and the LRS limit.
Rules at a glance
Three investors, three routes
Asha buys units of an overseas fund-of-funds from an Indian mutual fund, paying in rupees. She sends nothing abroad and her LRS limit is unused.
Bhaskar remits money through his bank under LRS and buys shares on an overseas stock exchange. The remittance counts towards his limit, TCS applies to the part of his remittances that year above ₹10 lakh, and he reports the shares in Schedule FA of his income-tax return.
Chitra remits money under LRS to a fund scheme in the GIFT IFSC. The remittance counts towards her LRS limit, and her units are in foreign currency. All three face market risk and currency risk.
Two layers of cost in a fund-of-funds
- Assume an overseas fund-of-funds has an expense ratio of 0.50% a year and the overseas fund it invests in has expenses of 0.30% a year. Both figures are assumptions for the example.
- On a holding of ₹2,00,000, taken as unchanged through the year for arithmetic only, the FoF layer is 0.50% × 2,00,000 = ₹1,000.
- The underlying fund's layer is 0.30% × 2,00,000 = ₹600.
- Total: ₹1,000 + ₹600 = ₹1,600 a year, which is 0.80% of ₹2,00,000.
Result. The FoF's own expense ratio of 0.50% shows only one layer; with the underlying fund the investor bears about 0.80% a year in this example. Both layers are reflected in the NAV.
Key points
- Indian mutual fund route: invest in rupees through a folio; no remittance by the investor, so the LRS limit is not used.
- Direct route: remit under LRS within the annual limit; TCS on larger remittances; foreign assets held directly are reported in Schedule FA of the tax return.
- GIFT IFSC route: also funded under LRS; holdings are in foreign currency.
- A fund-of-funds investor bears the FoF's expenses in addition to the underlying fund's.
- SEBI's overseas limits apply to mutual funds and can halt fresh subscriptions; they are separate from an individual's LRS limit.
Common misunderstandings
- Buying an Indian mutual fund scheme that invests overseas does not use the LRS limit: the investor makes no remittance.
- The GIFT IFSC is not outside the LRS: money sent there counts towards the same annual LRS limit.
- SEBI's overseas limits are not limits on the individual: they cap mutual funds, and they can halt a scheme's fresh subscriptions.
Questions people ask
Which route needs no remittance by the investor?
The Indian mutual fund route. Units are bought in rupees through a folio in India.
Does a halt on fresh subscriptions have anything to do with the LRS limit?
No. It arises from SEBI's limits on overseas investment by mutual funds, which are specific to the mutual fund route.
On which routes does TCS apply?
On the direct route, where the part of LRS remittances above a combined ₹10 lakh in a financial year attracts it, and in the same way on a remittance to the GIFT IFSC. The mutual fund route involves no remittance.
What this lesson relies on
- RBI — Liberalised Remittance Scheme (RBI FAQ on LRS)
- RBI A.P. (DIR Series) circular of 10 July 2024 on foreign-currency accounts of resident individuals with IFSC banking units under LRS
- SEBI Master Circular for Mutual Funds, 20 March 2026 (overseas investment limits)
- Income-tax Act, 2025, as amended by the Finance Act, 2026 — tax collected at source on remittances under the Liberalised Remittance Scheme (rates as of October 2026)
- Income-tax return forms — Schedule FA (foreign assets and income from a source outside India)
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.