The Indian Venture and Alternate Capital Association (IVCA), an industry body of Alternative Investment Funds (AIFs), has sought tax parity for private credit funds and regulatory clarity for Category III AIFs in the upcoming Union Budget.
In its recommendations submitted to the finance ministry, the association said that the current tax regime treats private credit funds less favourably than certain other categories that carry similar risk profiles.
Certain mutual fund schemes, which technically qualify as ‘equity-oriented’ due to a small portion of hedged equity exposure, attract 12.5% long-term capital gains tax and 20% short-term capital gains tax. In contrast, private credit AIFs, debt AIFs, and debt mutual funds are taxed as regular income at the highest marginal rate of around 39%.
Why private credit is seeking parity
“In private credit, the focus is on incentivising domestic capital to flow into areas such as MSMEs, startups, and infrastructure — segments that carry higher risk and are often underserved by traditional banks and NBFCs, including mutual funds,” said a spokesperson for IVCA.
Given the higher tax incidence for domestic investors, the association argued that there is merit in a more balanced tax treatment for private credit structures so that long-term domestic capital can participate more efficiently in financing these critical parts of the economy.
Call for a level playing field
IVCA has sought a ‘level playing field’ across debt-like instruments, recommending that AIFs, mutual funds, and bonds face comparable tax rates where the underlying risk and return profiles are similar.
The association also suggested that ‘equity-oriented funds’ should be classified based on actual net equity exposure, after factoring in derivatives and hedging positions — rather than relying on technical classifications that may not reflect real risk.
Category III AIFs: the tax ambiguity
For Category III AIFs, which include long-only equity funds, quantitative strategies, and derivatives-based funds, IVCA highlighted that there is no dedicated taxation framework under the Income-Tax Act.
Most Category III AIFs are structured as trusts, forcing them to follow private trust taxation rules that were never designed for institutional investment vehicles.
“This creates confusion, litigation, and in some cases, the risk of double taxation — once at the fund level and again in the hands of investors,” IVCA noted.
Market snapshot
As of September 2025,
Total AIF commitments stood at ₹15.05 trillion
Total investments were ₹6.11 trillion
Of this, Category III AIFs accounted for ₹2.92 trillion in commitments and ₹1.97 trillion in investments, underscoring their growing role in India’s capital markets.
The fine print
IVCA flags tax disadvantages for Private Credit AIFs compared to certain mutual fund schemes
Industry seeks clearer definition of ‘equity-oriented funds’ based on real net equity exposure
Category III AIFs continue to face tax ambiguity, increasing compliance risk and uncertainty
— Insights by Ranjit Jha (CEO)
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