Finance Minister Nirmala Sitharaman has announced tax relief to alternative investment funds (AIFs) in category 1 and 2, classifying securities as capital assets. With this change, AIF will also become similar to foreign portfolio investors.
The Finance Minister said in the budget announcements, ‘Alternative investment funds with category 1 and 2 will be able to invest in infrastructure sectors and other areas. I propose to bring these units a certainty in taxation on the benefits of securities.
AIF is a type of investment unit through which institutional investors and extremely wealthy investors invest in various properties including startups and real estate. With the proposed amendment, the AIF will have to pay taxes like capital gains rather than income from business on the sale of securities. This will reduce the burden of compliance on AIF.
According to tax experts, this step will reduce the tax liability of AIF to the rate of capital profit tax, while they have to pay tax at the rate of 30 per cent or more. Partner Sunil Gidwani, partner at Nangia Anderson, said, “In AIF 1 and 2, investors will have to pay tax on income from funds in capital profit, dividend or interest.”
Category 2 AIF is a big segment and has invested more than Rs 9.76 lakh crore and has raised a fund of Rs 3.44 lakh crore. Industry experts believe that the move will make it easier for fund managers and investors to do business and will help attract institutional capital for a long time. Gopal Jain of Gaza Capital said, “By clarifying taxation, the government has ended the ambiguity on AIF tax which will increase the trust of investors and reduce potential litigation.”