Tax Pass-Through in AIF Categories I & II — How Income Reaches Investors

Unlike pooled mutual funds, many AIFs are structured as pass-through vehicles—they act as conduits where income flows directly to investors’ hands rather than being taxed twice.

Mechanism
Category I and II AIFs (Venture Capital, Private Equity, Debt) enjoy pass-through status for all income except business income under current law. The fund calculates each investor’s share and issues an annual statement.

Why It Matters
Tax liability mirrors your own profile: an NRI and a domestic investor in the same AIF may pay different taxes on identical distributions.

Best Practice
Request:

• Year-end capital-account statement.
• Chartered Accountant certificate summarising income heads.
• Confirmation that business income, if any, is taxed at fund level.

Suggested Visual: Pipeline illustration — AIF → Investor (Tax Pass-Through).

Key Takeaway: Pass-through simplifies taxation but shifts responsibility to investors—plan filings accordingly.

Disclaimer: Educational only; not tax advice.