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Alternative Investment Funds (AIFs) in India have emerged as one of the attractive investment options for experienced investors looking to diversify their portfolios and potentially receive huge returns. What are AIFs and their types and tax implications? We’ll explore them in this blog.
What is an AIF?
According to the Securities and Exchange Board of India (SEBI), an AIF in India is a fund established or incorporated that is a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, to invest under a defined investment policy.
Types of AIFs
The three types of AIF categories where one can invest:
- Category I: These kinds of AIFs offer investments in high-growth sectors such as startups, social ventures, small and medium-scale enterprises, and infrastructure. Economic growth is always stimulated for Category I AIFs; besides, there are all sorts of government incentives enjoyed by them. Category I AIF is usually closed with a mandatory three-year lock-in period.
- Category II: These AIFs include private equity and debt funds that are not incentivized by the government or given regulatory concessions. These funds seek returns through medium- to long-term investments in unlisted companies. Like Category I, they also have a closed-end structure, usually with a minimum three-year tenure.
- Category III: These AIFs in India use highly complex trading strategies, frequently taking the form of investments in listed or unlisted derivatives. This category includes hedge funds and funds for short-term returns. Category III AIFs are open-ended or closed-ended, which is different from the previous categories.
Who can Invest in AIFs in India?
HNIs, or sophisticated investors, who are looking to diversify their portfolios can invest in alternative investment funds in India, but they need to meet the below eligibility criteria:
- Indian residents, NRIs, and foreign nationals can invest in AIFs.
- The minimum investment amount to invest in AIFs is Rs 1 crore for investors.
- AIFs in India come with a minimum 3-year lock-in period.
What are the trends, features, and regulations of AIFs in India? Click here to read the blog.
Tax Implications on AIFs in India
- Long-term Capital Gains (LTCG): Investors who hold their investments for more than a year in Categories I and II are termed as long-term capital gains. They are taxed as per the rate applicable to LTCG tax. Long-term capital gains on listed shares are generally taxable at the rate of 10% and on unlisted shares and other assets at the rate of 20%.
- Short-term Capital Gains (STCG): Categories I and II are taxed usually at the short-term capital gains tax rate, which is based on the investor’s tax bracket. Overall, short-term capital gains are taxed at the rate of 15%.
- Dividends: These are taxable as per the investor’s tax slab.
- Interest: Any interest income earned through Category I and II AIFs is taxable as per the investor’s tax slab.
Final Thought
AIFs in India give attractive investment opportunities to those looking to diversify their portfolios and potentially achieve higher returns. AIFs in India help investors minimize their exposure to traditional market fluctuations by investing in hedge funds, real estate, and private equities. However, often higher returns come with increased risk. It is advisable to contact a financial expert before you plunge into the realm of AIFs in India.
