How are Category I and II AIFs taxed in India?

Category I and II AIFs have a statutory pass-through status for all income except business income under Section 115UB of the Income-tax Act, 1961. Income is taxed directly in the hands of the investor in the same character as if they had earned it themselves. The AIF itself is exempt from tax on this income. Any business income is taxed at the fund level at 30% plus surcharge and cess.

What is the tax treatment for Category III AIFs?

Category III AIFs do not have a pass-through tax regime under Section 115UB. The income of these funds is taxed at the fund level, depending on their legal structure (trust, LLP, or company). For trust structures, tax is levied at the applicable maximum marginal rate for that year. For FY 2025-26, the effective maximum marginal rate works out to approximately 42.744% (30% base rate, 37% surcharge, and approximately 4% health and education cess).

How are capital gains from AIFs taxed in India?

Capital gains from AIFs are taxed based on the holding period and asset type. After the 23 July 2024 amendments under the Finance (No. 2) Act, 2024: LTCG on equity-oriented assets under Section 112A is taxed at 12.5% on gains above Rs. 1.25 lakh if held for more than 12 months; STCG under Section 111A is taxed at 20% if held for 12 months or less; other LTCG is taxed at 12.5% without indexation; and STCG on debt assets is taxed at the investor's personal slab rate. Budget 2025 made no changes to these rates.

Can an investor in an AIF offset capital losses?

Yes, subject to Section 115UB conditions. Short-term capital losses (STCL) can be set off against both STCG and LTCG. Long-term capital losses (LTCL) can only be set off against LTCG. Losses can be carried forward for up to 8 years, provided they are reported in the income-tax return within the due date. Business losses of an AIF are not passed on to investors and remain at the fund level.

What is the tax treatment for carried interest in AIFs after Union Budget 2025?

The Union Budget 2025 clarified that carried interest, which is the fund manager's share of profits from an AIF, will be treated as capital gains rather than as salary or professional income. It is taxed at the applicable capital gains rate depending on the holding period and asset type, effective from AY 2026-27.

How do DTAA (Double Taxation Avoidance Agreements) affect NRI investors in AIFs?

NRIs can use DTAA benefits to reduce their tax liability in India. DTAAs lower withholding tax (TDS) on income such as interest and dividends. Treaties with countries like Singapore or Mauritius can reduce TDS on interest and dividends from approximately 30% to 5-10%. To claim these benefits, investors must provide a valid Tax Residency Certificate (TRC) and Form 10F to the AIF before distribution. Late submission results in higher TDS being deducted, which must then be reclaimed through ITR.

What are Forms 64C and 64D, and why are they important?

Forms 64C and 64D are prescribed under Section 115UB of the Income-tax Act, 1961, for AIF compliance. Form 64C is issued by the AIF to each investor by 30 June of the following financial year, showing their share of income by income type and TDS details. Form 64D is filed by the AIF with the Income-tax Department by 15 June, consolidating income distributed to all investors. Form 64C is the primary document for reporting AIF income in your ITR. Mismatches between Form 64C and the Annual Information Statement (AIS) are a common source of tax notices.

Do investors in AIFs need to pay advance tax?

Yes, both resident and non-resident investors must pay advance tax if their total tax liability for the financial year is expected to exceed Rs. 10,000. TDS deducted by the AIF under Section 194LBB is often only 10% and may not cover the full liability, particularly for interest income (where the effective rate can reach approximately 42.744%) or STCG income under Section 111A (taxed at 20%). Shortfalls attract interest under Sections 234B and 234C of the Income-tax Act, 1961.

What are the key tax planning tips for AIF investors?

Key tax planning tips for AIF investors include: choosing Category I and II AIFs for pass-through status on capital gains; timing equity exits beyond 12 months to access the 12.5% LTCG rate under Section 112A rather than the 20% STCG rate under Section 111A; accounting for surcharges (high-income investors above Rs. 5 crore face up to 37% surcharge on interest income but only 15% surcharge on capital gains); submitting TRC and Form 10F before distributions for NRIs to access DTAA treaty rates; and reconciling Form 64C with AIS before filing the ITR.

What ITR form should an AIF investor file?

The appropriate ITR form depends on the nature of the income received from the AIF. ITR-2 is applicable for investors whose income from the AIF comprises capital gains. ITR-3 is applicable if the investor has business income from the AIF or any other source.

What is the SEBI dematerialisation mandate and how does it affect AIF investors?

SEBI, vide its amendment notification dated 5 January 2024 and Circular No. SEBI/HO/AFD/PoD/CIR/2024/5 dated 12 January 2024, mandated that AIFs hold their investments in dematerialised form. Following a timeline relaxation in February 2025, all AIF investments made on or after 1 July 2025 must be held in dematerialised form. Investments made before that date that fall under specified conditions must be dematerialised by 31 October 2025. SEBI also extended the mandatory custodian appointment requirement to all AIFs regardless of corpus size. For investors, this means greater transparency on unit holdings and better reconciliation with depository records.

Is TDS under Section 194LBB the final tax for AIF investors?

No. Section 194LBB requires the AIF to deduct TDS at 10% on income paid or credited to resident investors under Category I and II AIFs. This 10% is not the final rate for most income types. For interest income at the 30% slab with 37% surcharge and cess, the effective tax rate can be approximately 42.744%. For STCG under Section 111A, the applicable rate is 20%. The gap between TDS deducted and final tax liability must be covered through advance tax, paid across four due dates in the financial year.

CALL US +91-99301 56000 support@treelife.in

BOOK A CONSULT

Home > Finance > AIF Taxation in India – Rates, Rules & Guide for Investors (2026 Update)

AIF Taxation in India – Rates, Rules & Guide for Investors (2026 Update)

Written By

Treelife

Published on

May 18,
2026

Last updated on

May 18, 2026
19:12

Link copied to clipboard!

https://dev.treelife.in/finance/aif-taxation-in-india/

Startup

Investor

Going Global

Startup

Investor

Going Global

AIF Taxation in India – Rates, Rules & Guide for Investors (2026 Update)

Written By

Published on

May 18,
2026

Last updated on

May 18, 2026
19:12

Share

Need help with AIF Taxation?

Lets Talk

Startup

Investor

Going Global

Startup

Investor

Going Global

AIF Taxation in India – Rates, Rules & Guide for Investors (2026 Update)

Written By

Published on

May 18,2026

Last updated on

May 18, 202619:12

Share

Need help with AIF Taxation?

Lets Talk

May 18,
2026

May 18, 2026
19:12