Taxation Framework Changes for AIFs

March 28, 2025

Recently, amendments to the taxation framework for Alternative Investment Funds (AIFs) were proposed in the Finance Bill. These changes aim to clarify the tax treatment of securities held by AIFs and enhance transparency in investment structures. The amendments are part of a broader effort to align tax laws with the evolving regulatory environment.

Definition of Capital Asset

The Finance Bill 2025 introduces a revised definition of capital asset under Section 2(14) of the Income Tax Act, 1961. Securities held by Category I and Category II AIFs are now classified as capital assets. This change is designed to provide uniformity in taxation across different investment vehicles.

Inclusion of International Financial Services Centres

The definition of capital assets has been expanded to include securities held by AIFs that comply with regulations from the International Financial Services Centres Authority (IFSCA) or SEBI. This amendment aims to offer more flexibility to AIFs operating in India and offshore financial hubs.

Amendments to Section 10(4D)

The government proposed amendments to Section 10(4D) of the Income Tax Act, which currently exempts specified funds from income tax. The proposed changes simplify tax benefits for investment vehicles operating within the International Financial Services Centre (IFSC). This aims to boost investment in India’s financial markets.

Budgetary Context and Expenditure Proposals

The Union Budget for 2025-26 anticipates total expenditure of Rs 50.65 trillion, reflecting a 7.4% increase from the previous fiscal year. The proposed capital expenditure is Rs 11.22 trillion, with an effective capital expenditure of Rs 15.48 trillion. The budget also estimates gross tax revenue collection at Rs 42.70 trillion.

Fiscal Deficit and GDP Projections

For the fiscal year 2025-26, the projected fiscal deficit is 4.4%, down from 4.8% in the previous fiscal year. The estimated GDP for FY2025-26 is Rs 3,56,97,923 crore, marking a growth of 10.1% over the revised estimates for FY2024-25.

Resource Allocation to States

Total resources allocated to states in the 2025-26 Budget, including devolution of states’ share and Centrally Sponsored Schemes, amount to Rs 25,01,284 crore. This represents an increase of Rs 4,91,668 crore compared to the actuals of 2023-24, reflecting the government’s commitment to support state-level initiatives.

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