Tax clarity on AIFs, a good start

While the Budget has done its part, SEBI needs to address regulatory challenges to make the AIF industry more transparent and investor-friendly – By Prof. Harsimran Sandhu

Budget 2025-26 delivered a long-awaited tax clarity for Alternative Investment Funds (AIFs) in Categories I and II, aligning them with Foreign Portfolio Investors (FPIs). The Finance Minister’s announcement that AIFs will now be taxed under capital gains instead of business income is a crucial step in making India’s alternative investment space more predictable and attractive for investors.

This move significantly reduces the tax burden on AIFs, with rates dropping from over 30 per cent to 12.5 per cent, and brings much-needed certainty for institutional investors and ultra-high-net-worth individuals (UHNWIs) investing in private equity, venture capital, and infrastructure projects. By formally classifying securities held by AIFs as capital assets, the government has removed a major compliance hurdle, ensuring uniform tax treatment and reducing ambiguity in investment planning.

However, while the Finance Ministry has done its part, the responsibility now shifts to SEBI. The tax issue may be settled, but the broader regulatory challenges facing AIFs remain unaddressed. Without deeper structural reforms, India’s alternative investment space risks becoming a high-cost, opaque, and distributor-driven market that disproportionately benefits fund managers and intermediaries at the expense of investors. Over the past decade, AIFs have emerged as a preferred investment vehicle for sophisticated investors seeking diversification beyond traditional asset classes.