Budget boost for AIFs: Securities reclassified as capital assets

Mumbai, Feb 1, 2025

Securities sales to attract capital gains tax, not business income tax

Finance Minister Nirmala Sitharaman announced tax relief for Alternative Investment Funds (AIFs) in categories I and II in her Budget speech, reclassifying securities as capital assets. This change brings AIFs on par with Foreign Portfolio Investors (FPIs).

“Category I and Category II AIFs are undertaking investments in infrastructure and other such sectors. I propose to provide certainty of taxation to these entities on the gains from securities,” FM Nirmala Sitharaman said in the Budget announcements.

AIFs are pooled investment vehicles catering to institutional investors and ultra-high-net-worth individuals, investing in various asset classes, including startups and real estate. With this amendment, the sale of securities by AIFs will be taxed as capital gains, rather than business income, reducing the compliance burden.

According to tax experts, this move could lower the tax outgo from over 30 per cent to the rates applicable on capital gains.

“The CBDT had earlier issued clarification on treatment of income sale of securities as capital gains. This is now proposed to be codified to treat securities held by CAT I & II AIFs classified as a capital asset,” explained Sunil Gidwani, Partner, Nangia Andersen.

Category II AIFs, the largest segment, have over Rs 9.76 trillion commitments and Rs 3.44 trillion funds raised. Industry experts believe this move will ease business for fund managers and investors, attracting long-term institutional capital.

Gopal Jain, Gaja Capital, noted, “By clarifying the tax treatment, the government has eliminated ambiguity, reinforced investor confidence, and reduced potential litigation.”

This uniform treatment of capital gains taxation will enhance India’s private capital industry competitiveness, encouraging investments in high-growth sectors, said experts.

[The Business Standard]