Alternate Investment Fund (AIF) taxation will depend on and vary with each category. For CAT I & CAT II, there is a pass-through status. Category III AIFs have not yet been accorded a Pass-through status.
Tax implications on CAT I and CAT II AIF
1.Pass Through Income Status
- Pass-through status means that the income or loss (other than business income) generated by the fund will be taxed at the hand of the Unit Holder and not by the AIF
- They are governed by a special tax regime as provided under Section 115UB of the Income-tax Act, 1961 (the Act)
- The Unit Holders shall be chargeable to tax on the income accrued/ received by them in the same manner as if it were the income accruing or arising to, or received by, such persons had the investments, made by the AIF, been made directly by such investors. Income taxable in investors’ hands shall be deemed to be of the same nature and proportion as in the hands of the AIF
- Unit Holders who have held Category I and Category II AIF units for a period of more than 12 (twelve) months are eligible to benefit from a ‘pass-through’ status of losses (other than losses under the head of ‘profits and gains of business or profession) incurred by such AIFs
2.TDS deduction by AIF
- TDS has to be deducted by AIF on the income (except business income) distributed/ credited by AIF to the unit holder.
- AIF shall, at the time of credit of such income to the account of such unitholder or at the time of payment whichever is earlier, deduct income tax thereon under section 194LBB
- In the case of resident unit holders, AIF is required to deduct tax of the Act at the rate of 10% of such income derived
- For a non-resident unit holder or a foreign company, the deduction is required to be done at the rates in force prevalent during the relevant financial year or the rates specified in the applicable Double Taxation Avoidance Agreement (“DTAA”) entered between India and the country of residence of such non-resident.
- The prevalent rate for AY 22-23 are as below-
Particulars | Rate |
On income by way of long-term capital gains referred to in 112(1)(C)(iii) (Sale of Unlisted Securities held for more than 24 months) | 10% |
On income by way of long-term capital gains referred to in section 112A exceeding one lakh rupee (Sale of Listed Shares held for more than 12 months) | 10% |
On income by way of short-term capital gains referred to in section 111A (Sale of Listed Shares held for less than 12 months) | 15% |
On any other investment income | 20% |
*Please note Surcharge and Cess shall be additionally levied as applicable.
3.Taxability in the hands of the Unit Holders
For Resident Unit Holders:
Particulars | Rate |
On income by way of long-term capital gains on Sale of Unlisted Securities held for more than 24 months | 20% (with indexation) |
On income by way of long-term capital gains referred to in section 112A exceeding one lakh rupee (Sale of Listed Shares held for more than 12 months) | 10% (No indexation) |
On income by way of short-term capital gains referred to in section 111A (Sale of Listed Shares held for less than 12 months) | 15% |
On any Long Term Capital Gains | 20% (with indexation) |
On Dividend Income/ Interest Income/ Other Short-term capital gains | Slab rates |
For Non-Resident Unit Holders: Prevalent rate or Rate as per DTAA.
Prevalent rate:
Particulars | Rate |
On income by way of long-term capital gains on Sale of Unlisted Securities held for more than 24 months | 10% (No indexation) |
On income by way of long-term capital gains referred to in section 112A exceeding one lakh rupee (Sale of Listed Shares held for more than 12 months) | 10% (No indexation) |
On income by way of short-term capital gains referred to in section 111A (Sale of Listed Shares held for less than 12 months) | 15% |
On any Long Term Capital Gains | 20% (with indexation) |
On Dividend Income/ Interest Income/ Other Short-term capital gains | Slab rates |
*Please note Surcharge and Cess shall be additionally levied as applicable
4. PAN requirement for Non-resident Unit Holders
Unit Holders will need to file the Income-tax return in India for the income which is accrued to the AIF. Thus, Non- resident Unit Holders should obtain PAN in India and file their income tax returns. Please note that exemption is provided to Non-resident Unit Holders from filing Income Tax returns only if the AIF is set up in IFSC.
Further, Unit Holders should provide PAN to AIF beforehand so that AIF can seamlessly pass on the TDS credit against the relevant PAN and the Unit holders can take credit of such TDS in their respective income tax returns.
5. Conclusion
AIF is a very sophisticated investment vehicle, and the taxation rules make them a little complicated for unit holders. Do reach out to us if you’re an AIF (CAT I & CAT II) or a unit holder in one.
Authors:
CA Shreyans Dedhia
Partner | Email: shreyans.dedhia@masd.co.in | LinkedIn Profile
Sutishna Dhanuki
Associate Consultant | Email: sutishna.dhanuki@masd.co.in | LinkedIn Profile