AIF Pass-Through Status (Section 115UB)

This regime sits at Section 115UB of the Income tax Act, 1961 and at Section 224 of the Income tax Act, 2025 from Tax Year 2026-27, with the withholding provision moving to Section 393(1). The mechanics are unchanged. This article is for general information and does not constitute tax advice.

Category I and II only

The pass-through regime applies to Category I and Category II Alternative Investment Funds registered with SEBI. Category III AIFs are excluded and are generally taxed at fund level instead, though a Category III AIF structured as a specified fund inside the IFSC framework accesses a different and favourable route, covered in Specified Fund Exemption and FPI Rates. The same category of fund ends up in a very different position depending on whether it sits inside that structure or outside it.

How the pass-through works

Business income earned by the fund is taxed at the fund, at the maximum marginal rate, and is exempt in unit holders’ hands. Every other kind of income, capital gains, interest and dividend, is exempt at fund level and taxed instead in unit holders’ hands, retaining the exact character it had for the fund. Capital gains stay capital gains at capital gains rates; dividend stays dividend. Nothing gets folded into ordinary income and taxed at slab rate by default.

The provision that makes this work is easy to miss. Securities held by a Category I or II AIF are deemed to be capital assets. Without that deeming, a fund trading actively could see its exits recharacterised as business income, which would be taxed at the fund at the maximum marginal rate and reach investors as exempt income they cannot offset losses against. The deeming is what gives investors certainty that an exit gain arrives as a capital gain.

One feature catches investors off guard: if the fund doesn’t distribute income during the year, it is deemed credited to investors on the last day of that financial year and taxed on that basis, whether or not any cash arrived. When the fund later actually pays that income out, it is not taxed again; the earlier deemed credit is what was assessed.

Losses pass through, but not all of them

Business losses stay at the fund and are carried forward there under the normal provisions. They never reach individual unit holders. Non-business losses can pass through, but with a condition worth knowing before you buy in: losses attributable to units held for less than 12 months are disregarded. That rule exists to stop an investor buying in shortly before a known loss event purely to capture the benefit, and it catches genuine late entrants too.

Withholding, and why it isn’t your final bill

The fund deducts 10% for resident unit holders, and rates in force or the applicable treaty rate for non-residents, at whichever is earlier of crediting and paying the income. The business-income portion, already taxed at the fund, is excluded from this deduction.

A worked example. An investor receives ₹8 lakh of interest income from a debt-focused AIF. TDS at 10% is ₹80,000. If that investor is at the top of the old-regime rates, around 42.7% all-in, the real liability is roughly ₹3.42 lakh, leaving a shortfall of about ₹2.62 lakh to be met through advance tax or self-assessment. Treating the 10% as settlement is one of the most common and most expensive assumptions in this area. The gap is smaller at lower slabs, but it exists at any rate above 10%.

One relief worth applying: surcharge on capital gains passing through is capped at 15%, even for investors whose other income would attract 25% or 37%. That materially changes the effective rate on a large exit for a high-income investor.

The paperwork, and when it arrives

The fund files a statement with the tax department in Form 64D by 15 June following the financial year, and issues each unit holder a Form 64C by 30 June, setting out their share of income by category. The investor reports it through Schedule PTI in their own return.

The timing matters more than it looks. Form 64C arriving at the end of June leaves the category-wise split unavailable during the first advance tax instalment in June, so an investor with meaningful AIF income is estimating rather than reconciling until the statement lands.

Non-resident investors

A treaty rate is not applied automatically from residency alone; it needs valid supporting documentation furnished to the fund in time, and late paperwork means withholding at the higher rate with a refund claim to follow. Separately, where a fund earns income that arises outside India, that offshore component is not taxable in India in a non-resident investor’s hands merely because it flows through an Indian fund. The character-retention principle cuts both ways.