India’s New Bill: Tax Relief for Category III AIFs, Transparency Concerns
By Business Desk
India’s 2026 Corporate Laws Bill proposes tax relief for Category III AIFs via LLP conversion, but raises privacy concerns due to mandatory partner disclosure.
The Corporate Laws (Amendment) Bill, 2026, proposes a significant change for Category III Alternative Investment Funds (AIFs) by allowing them to convert from their current trust structures into Limited Liability Partnerships (LLPs).
This legislative shift aims to alleviate the substantial tax disparity faced by these AIFs, which are presently subject to the Maximum Marginal Rate (MMR) of taxation at the fund level.
Understanding the Tax Advantage
Currently, Category III AIFs can face a tax burden reaching up to 39% under their trust structure. The proposed conversion to an LLP offers a more favourable flat tax rate of 30%.
This change could translate into potential tax savings of between 3% and 5% for these funds.
The Transparency Dilemma
However, this tax incentive introduces a notable trade-off concerning transparency. The LLP structure mandates the public disclosure of all partner identities.
This requirement for public visibility could deter investors who highly value privacy and confidentiality, presenting a challenge for fund managers considering the conversion.
Industry experts do not anticipate a complete migration to the LLP model. Fund managers will need to meticulously weigh the benefits of tax savings against the loss of investor confidentiality, along with potential restructuring costs and operational complexities.
Unresolved Carried Interest Taxation
A significant area the bill does not address is the taxation of carried interest, which represents the performance-based fees earned by fund managers. Ambiguity persists regarding whether this should be taxed as capital gains or business income.
Investors and other stakeholders will need to closely monitor the final version of the bill for any specific clauses that might protect investor confidentiality or clarify the taxation framework for carried interest.
Until these crucial details are definitively finalized, many fund managers are expected to maintain their existing trust structures to mitigate administrative and tax-related risks.