• Notification Date: 07-02-2025
• Notification No: N/A

Uncertainty remains the biggest test for the AIF managers regarding taxation carried interest

While clarification on tax arising from Category I and II Alternate Investment Funds did come recently, the taxation aspect of carried interest remains a concerning issue for all fund managers today. Carried interest is part of performance fee paid to management when the proceeds of the respective funds exceed threshold levels, so its tax is still ambiguous at Indian law points.

There is no head of the Indian tax legislation under which carried interest can be classified. And with this ambiguity left open, its treatment as service fee can be challenged to attract a maximum GST of up to 20%. The overall cost of operating funds gets increased and subsequently reduces returns from investments. An industry lobby effort has been an appeal to get the government clarification that carried interest should be capitalized as capital gain, in parity with international taxation standards.

The recent Union Budget resolved any lingering doubts on income from Category I and II AIFs: it will be taxed as capital gains at the rate of 12.5%. But the most important one is still pending: taxation of carried interest. The topic is still causing confusion, especially in the context of prior litigations. Experts have been demanding an amending clarification since the current update that came into effect is from FY 2025-26.