The Budget announcement has brought clarity for Category I and Category II alternative investment funds (AIFs) regarding the treatment of income from the sale of securities. The income earned by these funds will now be treated as capital gains, similar to foreign portfolio investors (FPIs), as opposed to being classified as business income. This move aims to reduce litigation and uncertainty for unit holders, as the tax rates for capital gains and business income differ significantly.
Amit Singhania, Partner at Areete Law Offices, stated that this clarification will remove the ambiguity surrounding the taxation of gains realized from the sale of investments by AIFs. The decision addresses long-standing disputes between taxpayers and tax authorities regarding the classification of such income. According to Amit Maheshwari, Tax Partner at AKM Global, this distinction has led to prolonged litigation and uncertainty for investment funds and stakeholders.
Furthermore, the Budget has eliminated the provision of Tax Collection at Source (TCS) on the sale of securities for AIFs. This will reduce the compliance burden for these funds and enhance the pace of exits, providing clarity on tax implications. Siddarth Pai, founding partner of 3one4 Capital, also welcomed the government’s initiative to increase funding for start-ups through a new fund of funds worth ₹10,000 crore. The Deep Tech fund of funds aims to support deeptech companies in scaling their operations in India, fostering research and development, and promoting commercialization.
Overall, these measures are expected to boost the AIF industry, provide tax clarity, and support the growth of start-ups in the country. The removal of TCS provisions and the classification of AIF income as capital gains will streamline operations and encourage investments in the Indian market.
