AIF industry seeks tax parity for private credit funds in Budget

India's AIF industry urges tax parity for private credit funds and clearer rules for Category III AIFs in the upcoming Union Budget to ensure fair treatment and reduce disputes

The Indian Venture and Alternate Capital Association (IVCA), an industry body of alternative investment funds (AIFs), has sought tax parity for private credit funds and clarity for Category III AIFs in the upcoming Union Budget.

 

In its recommendations submitted to the finance ministry, the association said that the current tax regime treats private credit funds less favourably than certain other categories that have similar risks.

 

Certain MF schemes, which technically qualify as ‘equity-oriented’ due to a small portion of hedged equity positions, pay 12.5 per cent long-term capital gains tax and 20 per cent short-term capital gains tax. On the other hand, private credit AIFs and debt AIFs, and debt MFs are taxed as regular income at the highest marginal rate of around 39 per cent.

 

“In private credit, the focus is on incentivising domestic capital to flow into areas such as MSMEs, startups and infrastructure--segments that carry higher risk and are often underserved by traditional banks and NBFCs including mutual funds. Given the higher tax incidence for domestic investors, there is merit in a more balanced tax treatment for private credit structures so that long-term domestic capital can participate more efficiently in financing these critical parts of the economy," said a spokesperson for IVCA. 

 

The association has sought a ‘level playing field’ across debt-like instruments, with AIFs, MFs, and bonds facing the same tax rates. It further suggested calculating actual net equity exposure in an ‘equity-oriented fund’ after factoring in derivatives positions.

 

For Category III AIFs, which include long-only equity funds, and quantitative and derivatives strategies, the association noted that there is no dedicated framework in the Income-Tax (I-T) Act for these schemes.

 

IVCA added that most Category III AIFs are structured as trusts and are forced to follow private trust taxation rules that were not meant for institutional investment vehicles.

 

“This creates confusion, litigation, and in many cases, the risk of being taxed twice — once at the fund level and again in the hands of investors,” said IVCA.

 

As of September 2025, total commitments in AIFs stood at ₹15.05 trillion, while total investments were at ₹6.11 trillion. Of this, Category III AIFs account for ₹2.92 trillion in commitments and ₹1.97 trillion in investments, according to data from the market regulator.

 

“There is a need for consistent guidance on issues such as the treatment of determinate trusts and the application of maximum marginal rates, so that taxation outcomes for investors are predictable and uniform. Simple legal recognition under the I-T framework can address double-tax risk while also reducing avoidable disputes,” said a spokesperson for IVCA.