Having due regard to the large number of representation received from various Industry and Investor Association(s), the present budget 2015-16 has come up with special tax regime for Investment Fund (Alternative Investment Fund (AIF) Category I and II registered under SEBI (AIF) Regulations, 2012 to improve the investment climate in the Country and also to promote the domestic manufacturing.

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AIFs Vis-à-vis BUDGET 2015-16
(Alternative Investment Fund)
EXISTING SCENARIO:
SEBI came out with Alternate Investment Fund Regulations in May 2012, though since then, no specific
exemptions ever found placed under the Taxation provisions to promote these funds. By and large since
the applicability of these Regulations close to 120 AIF were registered with SEBI within a span of short 2
years wherein majority of these funds had been in the nature of Trust to avail the benefit of Tax pass
through following the advance ruling of AIG (in Re: Advance Ruling P. No. 10 of 1996). Though lately The
Central Board of Direct Taxes (“CBDT”) issued a Circular No. 1 dated July 28, 2014 (“Circular”) to provide
‘clarity’ on the taxation of Alternative Investment Funds wherein it was provided that if ‘the names of
the investors’ or their ‘beneficial interests’ are not specified in the trust deed on the ‘date of its
creation’, the trust will be liable to be taxed at the ‘Maximum Marginal Rate’. This said circular created
lots of hue and cry in the entire AIF industry as well as proved dampening to the domestic as well as
foreign investors.
Having due regard to the large number of representation received from various Industry and Investor
Association(s), the present budget 2015-16 has come up with special tax regime for Investment Fund
(Alternative Investment Fund (AIF) Category I and II registered under SEBI (AIF) Regulations, 2012 to
improve the investment climate in the Country and also to promote the domestic manufacturing.
The same is discussed herein below:
PROPOSED TAX PROVISIONS:
As per the budget 15-16, Tax Pass through has been extended to AIF Category-I and Category-II which
covers the following nature of Investment Funds:
AIF Category – I: - Includes AIFs which invest in start-up or early stage ventures or social ventures or
SMEs or infrastructure or other sectors or areas which the Government or regulators consider as
socially or economically desirable.

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AIF Category – II : - Includes private equity fundsor debt funds which do not fall in AIF Cat-I and Cat
III and undertake leverage or borrowing for meeting day to day operational requirements.
The Salient Features of the proposed regime are discussed hereunder:
1. Applicability: Proposed regime to be applicable on “Investment Funds”(i.e. AIF Cat-I and Cat-II),
and Cat –III AIFs (Hedge Funds) falls outside the purview of the proposed regime.
2. Tax Pass Through to Investment Fund Income:
2.1. The Income stream of an Investment Fund is broadly sub-categorized as Business Income;
Capital Gains and Income from other Sources.
2.2. The Tax Pass Through1
is provided on Capital Gains and Income from other Sources though
not on Business Income.
2.3. Thus Business Income shall be taxable at the Fund level in accordance with the relevant
provisions of the Income Tax Act (before distributing to unit holders).
2.4. Investor is not required to pay tax on income accruing or arising to, or received by it out of
Fund’s Business income
2.5. The income received by the investor/unit holder from the Investment Fund, shall be deemed
to be of the same nature and in the same proportion as if it had been received by, or had
accrued or arisen to, the Investment Fund (i.e. proportion of Business Income; Capital Gain;
Income from Other Sources shall remain same in hands of Investor/unit holders as originally
held in Fund).
2.6. Tax Pass Through shall be enjoyed by Investment Fund whether set up as Trust, Company, or
Limited Liability Firm (LLP) etc.
3. No Pass Through to losses:
3.1. Loss of Investment Fund cannot be pass through to the Investor.
3.2. Loss (current / previous) to be carried forward at the Fund level to be set off against the
income of the next year in accordance with the provisions of Chapter VI of the Income Tax Act.
1
Income of Investment Fund (other than Business income) shall be taxable in the hands of its investors/unit
holders in the same manner as if it were the income accruing or arising to , or received by, such person had the
investments, made by the Investment Fund, been directly made by him.

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4. Dividend Distribution Tax: Provisions of Chapter XII D (Dividend Distribution Tax) and Chapter XII
E (Tax on distributed Income) shall not apply to the income paid by an Investment Fund to its
investor/unit holder.This provision brings clarity w.r.t. Investment Funds incorporated in form of
Company or other body Corporates.
5. Provisions of TDS (withholding Tax):
5.1. The income received by Investment Fundswould be exempt from TDS requirement.
5.2. TDS @10% shall be deducted by the Investment Fund from investor /unit holder on
distribution of Income (other than Business Income) to its investor/unit holder.
6. Other Disclosure Requirements
6.1. Mandatory for Investment Fund to file return of its income.
6.2. Fund to provide details of various components of income to investor/unit holder and Income
Tax Authorities.
CP COMMENTS:
1. VFC/VCC which has been registered under SEBI (VCF) Regulations, 1996 and which are continuing
without obtaining fresh registration under SEBI (AIF) Regulations, 2012; shall fall outside the
jurisdiction of new regime (i.e. Existing regime shall be applicable on them).
2. The new Tax provisions are welcoming for the Fund Industry and intend to boost confidence of both
domestic and foreign investors.
3. The removal of ambiguity with respect to taxability and providing pass through status for not only
Trust structure but also for LLP and Body Corporate will see large number of new AIFs being
registered and more money flowing in the economy.
4. Steps taken by the new government are positive in the direction of boosting Indian Economy and
endow the Indian corporate with better avenues to channelize the idle funds of HNIs and
Institutional Investors lying idle or unutilized.
5. The AIF has been made as double bonanza offer for the Corporate, being relatively relaxed with
minimum restrictions and intervention of Regulators, and now with the special tax regime it looks
even more lucrative from tax point of view.

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6. As the provisions of Chapter XII D and XII E of the Act are not applicable, income distributed by an
AIF registered as Company shall not be liable to deduct the dividend distribution tax under the
provisions of the Act.
7. Though, over and above all the positives, in the exemptions so granted, a small issue with respect to
“Business Income” remains unclear. The provision of Tax Pass through talks of Business Income to
remain taxable at the Fund level, though what will tantamount to “Business Income” remains
unclear and need to be elaborated upon. Since under SEBI AIF Regulations, 2012 Regulation 2(1) (b)
which defines AIF clearly broaches that the object of AIF shall be make investments from the pooled
money and thus entire income it earns from pool of money has to be its business income.Some clarity
in this respect ought to be received.
For Further queries please feel free to contact
Ms. Deepika Vijay Sawhney
Partner
Corporate Professionals,
Advisors & Advocates
Mobile: + 91 9818316936
Tel: +91.11.40622229
E-mail :Deepika@indiacp.com
DISCLAIMER
This Document is on the analysis of the provisions contained in respective governing laws and our understanding and interpretation of the
same and should not be constituted as an advice. Also this is only a abridged document giving brief about the provisions related to AIF
regulations,given in the Finance Bill 2015-16 and cannot be deemed to have detailed coverage regarding the points covered and other
conditions and provisions stipulated in the Finance Bill 2015-16 or Regulations. For any further query, reference should be drawn to the
Finance Bill 2015-16, Regulations and circulars as issued from time to time or a detailed opinion may also be sought from us. We expressly
disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this opinion.