AIF means any fund incorporated, which is a privately pooled investment vehicle that collects funds from sophisticated investors, for investing it following a defined investment policy for the benefit of its investors. These are governed by the SEBI (Alternative Investment Funds) Regulations, 2012. There are three categories of AIFs.
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Category I
Venture capital funds, Angel Funds, SME Funds, Social Venture Funds, Infrastructure funds.
Category II
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AIFs that do not fall under Category I & III, and which do not undertake leverage or borrowing like real estate funds, private equity funds, debt funds, etc.
Category III
AIFs which employ complex trading strategies or employing leverage like derivatives such as hedge funds, PIPE Funds, etc.
Taxation
Category I & II AIFs have been given a pass-through status u/s 115UB. This means any income (other than business income) earned by the AIF is tax-exempted u/s 10(23FBA). Since business income is taxable in the hands of AIF, it is exempted for the unit holders u/s 10(23FBB). So, for the investor, any income from investments made in such AIFs, are chargeable to tax as it were the income arising to such person, had the investments made directly by him. For Category III AIFs, the tax liability is based on the applicable rates corresponding to their constitution and the nature of the income; they do not have a pass-through status. A specific tax framework does not exist for Category III AIFs.
Amendment in Budget 2025
The definition of “capital asset” u/s 2(14) was amended to include securities held by AIFs of Category I & II. This ensures that income arising out of transfers of such securities invested in AIFs are always treated as capital gains. So, effectively, there is no change. The amendment clarified the status as capital asset for AIF Category I & II.
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