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INDEX
Nikhil 2
1 Investment Funds - Intro 3
2 Taxability of Investment Funds 5
3 Carry Forward and Set off 9
4 Other Related Provisions 10
Nikhil 3
Investment Funds- Intro
Categorization as per
SEBI
Alternative
Investment
Fund - I
Alternative
Investment
Fund - II
Alternative
Investment
Fund - III
Invests in early
stage startups or
early stage
ventures or SMEs
etc. and shall
include Venture
Capital funds,
SME funds,
Infrastructure
funds etc.
Which does not fall
under AIF-I or AIF-III
and which does not
undertake leverage
other than to meet day
to day operations. E.g.
Private Equity funds or
debt with no specific
concessions given by
govt. or any regulator.
Employs diverse or
complex trading strategies
and may employ leverage
including through
investment in Listed or
Unlisted Derivatives. E.g.
Hedge Funds or funds
which trade with a view to
make short term returns
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 4
Investment Funds- Intro
Chapter XII-FB and Section
115 UB of Income Tax Act
Investment fund means any fund established or incorporated in India in the form of a trust or a company or a
limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I
or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India
(Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act,
1992.
Note: Currently, the Indian tax laws do not contain any specific provisions governing taxability of Category III
AIFs. Typically, these are structured as trusts and the laws governing taxability of trusts are used for
determining taxability of Category-III AIFs and their investors. As most of the AIFs are constituted as business
trusts, the higher surcharge and Maximum marginal rate apply to their income streams
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 5
Taxability of Investment Funds
Provisions of Section
115 UB
Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this
Chapter, any income accruing or arising to, or received by, a person, being a unit holder of an investment fund,
out of investments made in the investment fund, shall be chargeable to income-tax 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 made directly by him.
Analysis of above
provision
All incomes earned by Investment fund shall be exempt u/s 10(23FBA) except
for the income under the head “Profit and Gains from Business or
Professions.” Investment funds enjoy “Pass through Status.”
This means that all income made by Investment fund whether u/h “Capital
Gains” or “Income from Other sources” shall be taxable in the hands of
Investor directly as if the investment is made directly by the investor.
Also the income in hands of investor shall be taxable in the same nature and
in the same proportion as it had accrued or arisen to the Investment Fund.
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 6
Taxability of Investment Funds
Rate of Taxation
Provisions of Section
115 UB
Rate of Taxation of Business Income of Investment Fund
Company/Firm Other cases
Rate or rates
specified in the
Finance act of
relevant year
Maximum Marginal
rate (MMR)
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 7
Taxability of Investment Funds
Investment Fund Investors
Business Income(PGBP) 100 Exempt
Capital Gain Exempt 50
Other Sources Exempt 150
Taxability of AIF I and AIF II Funds
Example: Suppose an AIF I category Investment fund has following incomes:
Business Income: Rs.100 crores
Capital Gain Income: Rs.50 crores
Income from Other sources: Rs.150 crores
Show the taxability of above incomes in the hands of Investment fund and Investors.
Note: The income taxable in the hands of investors under the head “Capital Gain” and “Income from Other
sources” will be in the same nature and proportion as it had accrued to Investment fund.
Rs.in crores
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 8
Taxability of Investment Funds
Taxability of AIF III Funds
Example: Suppose an AIF III category Investment fund has following incomes:
Business Income: Rs.100 crores
Capital Gain Income: Rs.50 crores
Income from Other sources: Rs.150 crores
Show the taxability of above incomes in the hands of Investment fund and Investors.
Solution
In AIF III all the income will be taxed at Investment fund level not at investor level
that means all the income received by investor from AIF III will be exempt.
Income accrued to Investment Fund Taxability of Income
Business income(PGBP) and Other sources Taxed at Maximum Marginal Rate
Capital Gain income LTCG or STCG depending on the holding period
Dividend Income Taxed @ 35.88%
Note: The income taxable at Investment fund level is not a TDS that is even if the investor’s tax liability is Nil
he/she cannot claim the benefit of tax paid by Investment fund at higher rate.
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 9
Carry Forward and Set off of Losses
For Investment Funds
Only such losses that are under the head “Profit and Gains
from Business or Professions” shall be allowed to be carry
forward and set off by Investment fund itself.
For Unit Holders
 Loss to the unit holder shall be allowed to be carry
forward and set off only if the unit holder hold the unit of
investment fund, in respect of which loss has arisen, for a
period of at least twelve months(Amended by Finance act
,2019).
 The loss other than the loss of PGBP if any accumulated
at the level of Investment fund as on 31st March 2019,
shall be distributed to the unit holder who held the unit as
on 31st March, 2019.
Such loss shall be allowed to be carry forwarded only for
remaining period calculated from the year in which loss
had occurred first time.
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
Nikhil 10
Other related provisions
Deduction of TDS Section 194 LBB
Resident
NRI/Foreign
company
At the rate
of 10%
Rates in force
Note:
 Investment fund shall deduct TDS at the time the income is accrued to the unit holder irrespective
of whether the same has been distributed to the unit holder or not i.e. if income is accrued in FY
2019 then TDS on the same shall be deducted in FY 2019 itself irrespective of the same has been
distributed to the unit holder in FY 2020.
 Investment fund shall furnish its return of Income in respect of its Income or Loss of every
previous year under section 139(4F) of Income tax Act, 1961.
Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions

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Alternative investment funds

  • 1.
  • 2. INDEX Nikhil 2 1 Investment Funds - Intro 3 2 Taxability of Investment Funds 5 3 Carry Forward and Set off 9 4 Other Related Provisions 10
  • 3. Nikhil 3 Investment Funds- Intro Categorization as per SEBI Alternative Investment Fund - I Alternative Investment Fund - II Alternative Investment Fund - III Invests in early stage startups or early stage ventures or SMEs etc. and shall include Venture Capital funds, SME funds, Infrastructure funds etc. Which does not fall under AIF-I or AIF-III and which does not undertake leverage other than to meet day to day operations. E.g. Private Equity funds or debt with no specific concessions given by govt. or any regulator. Employs diverse or complex trading strategies and may employ leverage including through investment in Listed or Unlisted Derivatives. E.g. Hedge Funds or funds which trade with a view to make short term returns Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 4. Nikhil 4 Investment Funds- Intro Chapter XII-FB and Section 115 UB of Income Tax Act Investment fund means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992. Note: Currently, the Indian tax laws do not contain any specific provisions governing taxability of Category III AIFs. Typically, these are structured as trusts and the laws governing taxability of trusts are used for determining taxability of Category-III AIFs and their investors. As most of the AIFs are constituted as business trusts, the higher surcharge and Maximum marginal rate apply to their income streams Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 5. Nikhil 5 Taxability of Investment Funds Provisions of Section 115 UB Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this Chapter, any income accruing or arising to, or received by, a person, being a unit holder of an investment fund, out of investments made in the investment fund, shall be chargeable to income-tax 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 made directly by him. Analysis of above provision All incomes earned by Investment fund shall be exempt u/s 10(23FBA) except for the income under the head “Profit and Gains from Business or Professions.” Investment funds enjoy “Pass through Status.” This means that all income made by Investment fund whether u/h “Capital Gains” or “Income from Other sources” shall be taxable in the hands of Investor directly as if the investment is made directly by the investor. Also the income in hands of investor shall be taxable in the same nature and in the same proportion as it had accrued or arisen to the Investment Fund. Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 6. Nikhil 6 Taxability of Investment Funds Rate of Taxation Provisions of Section 115 UB Rate of Taxation of Business Income of Investment Fund Company/Firm Other cases Rate or rates specified in the Finance act of relevant year Maximum Marginal rate (MMR) Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 7. Nikhil 7 Taxability of Investment Funds Investment Fund Investors Business Income(PGBP) 100 Exempt Capital Gain Exempt 50 Other Sources Exempt 150 Taxability of AIF I and AIF II Funds Example: Suppose an AIF I category Investment fund has following incomes: Business Income: Rs.100 crores Capital Gain Income: Rs.50 crores Income from Other sources: Rs.150 crores Show the taxability of above incomes in the hands of Investment fund and Investors. Note: The income taxable in the hands of investors under the head “Capital Gain” and “Income from Other sources” will be in the same nature and proportion as it had accrued to Investment fund. Rs.in crores Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 8. Nikhil 8 Taxability of Investment Funds Taxability of AIF III Funds Example: Suppose an AIF III category Investment fund has following incomes: Business Income: Rs.100 crores Capital Gain Income: Rs.50 crores Income from Other sources: Rs.150 crores Show the taxability of above incomes in the hands of Investment fund and Investors. Solution In AIF III all the income will be taxed at Investment fund level not at investor level that means all the income received by investor from AIF III will be exempt. Income accrued to Investment Fund Taxability of Income Business income(PGBP) and Other sources Taxed at Maximum Marginal Rate Capital Gain income LTCG or STCG depending on the holding period Dividend Income Taxed @ 35.88% Note: The income taxable at Investment fund level is not a TDS that is even if the investor’s tax liability is Nil he/she cannot claim the benefit of tax paid by Investment fund at higher rate. Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 9. Nikhil 9 Carry Forward and Set off of Losses For Investment Funds Only such losses that are under the head “Profit and Gains from Business or Professions” shall be allowed to be carry forward and set off by Investment fund itself. For Unit Holders  Loss to the unit holder shall be allowed to be carry forward and set off only if the unit holder hold the unit of investment fund, in respect of which loss has arisen, for a period of at least twelve months(Amended by Finance act ,2019).  The loss other than the loss of PGBP if any accumulated at the level of Investment fund as on 31st March 2019, shall be distributed to the unit holder who held the unit as on 31st March, 2019. Such loss shall be allowed to be carry forwarded only for remaining period calculated from the year in which loss had occurred first time. Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions
  • 10. Nikhil 10 Other related provisions Deduction of TDS Section 194 LBB Resident NRI/Foreign company At the rate of 10% Rates in force Note:  Investment fund shall deduct TDS at the time the income is accrued to the unit holder irrespective of whether the same has been distributed to the unit holder or not i.e. if income is accrued in FY 2019 then TDS on the same shall be deducted in FY 2019 itself irrespective of the same has been distributed to the unit holder in FY 2020.  Investment fund shall furnish its return of Income in respect of its Income or Loss of every previous year under section 139(4F) of Income tax Act, 1961. Investment Funds- Intro Taxability of Investment Funds Carry Forward and Set off Other Related Provisions