AIFs get clarity and parity on longstanding asks

The clarion call for the industry this year was on “Clarity and Parity” – clarity on AIF operations in Indian regulations and parity with foreign investors.

The 2025 Economic Survey stated that “Capital markets are central to India’s growth story, catalysing capital formation for the real economy, enhancing the financialisation of domestic savings, and enabling wealth creation.” It also stressed the need to further liberalise the Indian economy and provide regulatory clarity and certainty.

Budget 2025 has certainly provided this for AIFs in India. Capital formation through AIFs saw a decline in 2024 compared to stronger trends in the previous year. This was also due to strong regulatory action, especially by the RBI, on investments in AIFs.QoQ AIF Industry Growth

A key ask was on the classification of gains made by AIFs. Indian tax law has compendium of cases of whether gains from investments are capital gains or “Business Income”. FPIs got tax certainty in 2014 when the late Shri Arun Jaitley classified all securities held by FPIs to be capital assets u/s 2(14), thus ensuring that all income from their transfer would be capital gains. AIFs had to rely on a patchwork of circulars and case laws for clarity. This resulted in foreign investors preferring FPIs and foreign vehicles for investments in India as opposed to AIFs.

Extending parity with FPIs on income classification solves a host of potential issues for AIFs and gives us complete regulatory clarity.

On a similar vein, the question of whether the sale of securities by an AIF attracted Tax Collected at Source (TCS) provisions or not held up a number of exits. Tax counsels would debate endlessly on this matter and hold up transactions, forcing AIFs to provide tax indemnities, get insurance, etc. on this matter. The Section (206(C)(1h)) was meant to apply to Business Income, but lack of clarity on the definition of goods lead to delays.

Its removal from April 1, 2025 will increase the pace of exits.

New Fund of Fund for Startups

The Fund of Funds for Startups of Rs 10,000 crore helped galvanize over Rs 90,000 crore of capital for investment in Indian Startups. The Government has acceded to the AIF Industry’s request for a new Fund of Funds of Rs 10,000 crore. The capital support acts as a nucleus for various AIFs investing in Indian entrepreneurship. This will increase rupee capital participation in Indian startups and increase the pace of entrepreneurship in India. The focus on women entrepreneurs shows the government’s commitment to increasing women participation in the economy. The Economic Survey noted that close to half of all DPIIT registered startups have at least one-woman director. This measure will boost it further.

Commitment to a Deeptech Fund of Funds will provide the capital needed for deeptech companies to scale in India. If this is structured to provide long term capital support, this will be a huge boost to R&D in India, development of fundamental research and eventual commercialization

Startups incorporated up to March 31, 2030 can avail of the tax benefits for startups, provided they are recognized by the Inter Ministerial Board (IMB), through the IMB is in dire need of reform.

The government’s pledge to provide tax certainty and reduce litigation has given a major boost to the attractiveness of Indian AIFs and will help increase capital formation in India and for Indian entrepreneurs.