Q1. Does pass-through status under the Income-tax Act apply to the AIF automatically, or does the fund need to file for it?
Pass-through status applies automatically to a fund meeting the statutory definition of an "investment fund" — essentially, a SEBI-registered Category I or Category II AIF (or the IFSCA equivalent) — provided the fund satisfies the conditions prescribed under the relevant provision of the Income-tax Act, 2025. There is no separate election or application process; eligibility is fact-based, not opt-in.
Q2. What happens if a Category I/II AIF loses its SEBI registration mid-year — does pass-through status lapse immediately?
This is a fact-specific question that depends on the circumstances of the deregistration and the specific provisions in force at the relevant time. As a general principle, pass-through eligibility is tied to the fund continuing to meet the statutory "investment fund" definition, which in turn depends on SEBI registration status — funds facing this situation should seek specific advice rather than assume continuity or immediate lapse.
Q3. Is the AIF itself required to withhold tax (TDS) before distributing pass-through income to investors?
Yes. Even though pass-through income is taxed in the investor's hands rather than the fund's, the fund is generally required to deduct tax at source on income credited or paid to investors, at rates prescribed for this purpose, before distribution.
Q4. How is business income of a Category I/II AIF taxed differently from its pass-through income?
Business income earned by the fund is taxed at the fund level itself — generally at the maximum marginal rate — and is excluded from pass-through treatment entirely. This is why fund managers are careful to structure investment activity to avoid inadvertently generating "business income" character where the fund's strategy is intended to generate capital gains.
Q5. What determines whether gains from an AIF's investment activity are "capital gains" versus "business income"?
This determination follows the same general principles applied to any taxpayer — frequency and volume of transactions, holding period, intent at acquisition, and the manner of financing the investment, among other factors — applied to the fund's specific pattern of activity. For AIFs with a genuinely long-term, buy-and-hold private equity/venture capital strategy, capital gains characterisation is generally more defensible than for funds with high-frequency trading activity.
Q6. How is carried interest characterised for tax purposes?
Carried interest is generally treated as capital gains where it is structured as a genuine share of the fund's investment profits, contingent on fund performance and structured through the fund's own unit/interest economics — rather than as a separate contractual fee. The precise characterisation depends on the legal structuring of the carry mechanism, and this is an area where structuring at fund formation stage, rather than after the fact, materially affects the outcome.
Q7. Are foreign investors in a Category I/II AIF entitled to DTAA relief on pass-through income?
Yes, in principle, foreign investors can claim relief under an applicable Double Taxation Avoidance Agreement on pass-through income, subject to satisfying the conditions of the relevant treaty (including obtaining a Tax Residency Certificate and any other prescribed documentation) and subject to the fund's withholding obligations at the time of distribution.
Q8. What is the "Form 64" statement, and who is responsible for issuing it?
The fund (or the person responsible for making payments on its behalf) must issue a prescribed statement to each investor, and a corresponding statement to tax authorities, detailing the nature and quantum of pass-through income for the year — enabling investors to correctly report it in their own returns. See our dedicated article, "Form 64 Explained," for full mechanics.
Q9. What happens to a fund-level business loss — can it be carried forward, and by whom?
Business losses at the fund level (Category I/II AIFs) are carried forward and set off by the fund itself, not passed through to individual investors, under the applicable loss carry-forward provisions.
Q10. Can non-business losses be passed through to investors, and are there conditions attached?
Yes, subject to conditions — notably a minimum holding period requirement for the relevant units — designed to prevent investors from entering a fund shortly before a loss-generating event purely to access a pass-through loss benefit.
Q11. How is a Category III AIF's income taxed differently from Category I/II?
Category III AIFs do not get pass-through status. All income at the fund level — regardless of character — is taxed in the hands of the fund itself, generally at the maximum marginal rate (subject to the fund's specific entity structure), before any distribution to investors.
Q12. Does GST apply to AIF management fees and carried interest?
Management fees charged by the investment manager are generally subject to GST as a taxable supply of services. Carried interest, where structured as a share of fund profits rather than a separate fee-for-service, is typically analysed differently — this is a fund-specific structuring question best confirmed with your advisor given the significant GST exposure at stake.
Getting Fund-Specific Tax Advice
Every answer above is a general principle — actual application depends heavily on the specific fund's structure, category, and PPM terms. Speak with our fund tax advisory team before finalising your fund's tax positions.
This FAQ is for general informational purposes only and does not constitute tax advice. Please consult us for guidance specific to your fund's facts and structure.