AIF taxation in India — Section 224 of the Income-tax Act, 2025, and what it changed

What this page is

The statutory position, cited to the Act. AIF taxation is one of the most misreported subjects in Indian finance writing, and the reason is dated: practically every guide on the open web still cites Section 115UB of the Income-tax Act, 1961, which no longer exists.

This page gives no rates. Rates and surcharge come from the Finance Act of the relevant year and depend on the character of the income and on the investor's own position. It is not tax advice, and it does not replace a chartered accountant.

What changed on 1 April 2026

The Income-tax Act, 2025 received Presidential assent on 21 August 2025, was published in the Gazette of India Extraordinary, Part II Section 1, No. 35, and came into force on 1 April 2026, repealing the Income-tax Act, 1961.

The provision that gave Category I and II AIFs pass-through status was Section 115UB of the 1961 Act. Its successor is Section 224 of the 2025 Act, headed "Tax on income of investment fund and its unit holders".

The substance carried over. The numbering did not. Any page still telling you that AIF pass-through sits in Section 115UB is describing a repealed statute, and that includes most of the first page of Google results for this query today.

Who Section 224 applies to

Section 224(10)(a) defines an investment fund as a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate, which holds a certificate of registration as a Category I or a Category II Alternative Investment Fund, regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the IFSCA fund management regulations.

Read that definition carefully, because everything else follows from it.

The cross-reference points at a repealed instrument

Section 224(10)(a)(ii) does not say "the IFSCA fund management regulations" in the abstract. It names them: the International Financial Services Centres Authority (Fund Management) Regulations, 2022, made under the International Financial Services Centres Authority Act, 2019.

Those regulations no longer exist. The IFSCA (Fund Management) Regulations, 2025 expressly repeal them.

So a statute that commenced on 1 April 2026 identifies, by year, an instrument that had already been repealed before it commenced. The Income-tax Act, 2025 was drafted against the regime in force when it was written, and the IFSCA regime was replaced underneath it in the interval between assent and commencement.

The obvious answer is that this does not matter, because a reference to a repealed instrument is read as a reference to whatever replaced it. That is the rule in Section 8 of the General Clauses Act, 1897, and on checking it, it does not reach this case on its face.

Section 8(1) applies where "this Act, or any Central Act or Regulation made after the commencement of this Act, repeals and re-enacts" a provision. The repealing instrument here is the IFSCA (Fund Management) Regulations, 2025 — made by a statutory regulator, so neither a Central Act nor a "Regulation" in the sense the General Clauses Act uses. Section 3(50) defines "Regulation" as one made by the President under Article 240 or 243 of the Constitution, or by the Central Government under the Government of India Acts of 1870, 1915 or 1935. Regulations made by SEBI or IFSCA are not that; under Section 3(51) they are rules. Section 24, which continues orders and rules made under a repealed enactment, is keyed to the same phrase and does not fit either — it addresses a parent Act being replaced, which is the reverse of what happened here.

So the statutory tidy-up most people would reach for is not obviously available, and this page is not going to assert a conclusion it cannot source. What can be said is narrower:

• The 2025 regulations succeed the 2022 regulations in substance as well as in name, and nothing suggests Parliament meant to exclude IFSC funds.
• Nothing here affects a domestic Category I or Category II AIF. Those come in through Section 224(10)(a)(i), the SEBI limb, which is intact.
• If you are relying on the IFSC limb for a GIFT City vehicle, this is a question for a tax adviser, and a more pointed one than it looks. Take the citation with you.

The current GIFT City regime, including what the 2025 regulations changed, is at GIFT City AIFs.

Category III is not in it. A Category III AIF is not an investment fund for the purposes of Section 224, so the section's pass-through machinery does not reach it at all. That is the single most consequential fact on this page, and it is a matter of definition rather than of rate.

The pass-through, in the Act's own terms

Section 224(1). Where a unit holder of an investment fund receives income, or income accrues to them, out of investments made in the fund, that income is chargeable to income-tax "in the same manner as if, it were the income accruing or arising to, or received by, such person, had the investments made by the investment fund been made directly by him."

Section 224(5). The income keeps "the same nature and in the same proportion" in the investor's hands as it had in the fund's. A capital gain reaches you as a capital gain; interest reaches you as interest. This is why pass-through matters: without it, everything would arrive as one undifferentiated distribution.

Section 224(7). If the fund does not pay or credit the income to you, it is deemed credited on the last day of the tax year anyway, in the proportion you would have been entitled to. Section 224(8) then stops the same income being taxed a second time when it is actually paid.

So a Category I or II investor can face tax on income the fund has not distributed. This surprises people, and it is worth planning cash for.

Section 224(9). The fund, and whoever credits or pays the income on its behalf, must furnish a statement of the nature of the income to the unit holder and to the tax authority in the prescribed form. That statement is the document you file from. Ask for it.

Business income is the exception

The pass-through is not universal. It covers income other than business income.

Section 224(6) charges the total income of the investment fund itself:

• at the rates in the Finance Act of the relevant year, where the fund is a company or a firm; or
• at maximum marginal rate, in any other case.

Most Indian AIFs are constituted as trusts. For them, the second limb applies — income taxed at the fund is taxed at maximum marginal rate, regardless of the investor's own slab.

What happens to losses

Section 224(2) is where the asymmetry sits, and it is the part most guides omit.

• A business loss of the fund is carried forward and set off by the fund under Chapter VII, and is "ignored for the purposes of sub-section (1)". It does not reach you.
• Any other loss is also ignored for pass-through if it arose on a unit you had not held for at least twelve months.

Gains pass through from day one. Losses on units held under twelve months do not. That asymmetry is deliberate — it stops a fund's early losses being harvested by investors who were briefly in it — and it means the tax outcome of an AIF investment depends on when you came in as well as on what the fund did.

Section 224(3) and (4) deal with losses accumulated at fund level as at 31 March 2019, deeming them to the unit holder who held on that date. It matters only for funds that old.

Why the search results contradict each other

If you have read three articles on this and got three answers, this is why.

Most cite a repealed section. Section 115UB was the right citation until 31 March 2026. Pages written before then, and pages copied from them since, are not wrong about the substance so much as pointing at a statute that no longer exists.

Some quote a single headline rate for Category III. There isn't one. Category III is outside Section 224, and what it pays depends on how the fund is constituted, what kind of income it earns, and the Finance Act of the year. A single percentage presented as the Category III rate is a simplification of something that varies fund by fund.

Almost none mention the twelve-month loss rule, which is in the statute and changes real outcomes.

What to ask, and of whom

Ask the fund for the Section 224(9) statement, the character breakdown of the income, and whether any income has been deemed credited but not distributed.

Ask your CA what the character-wise income does to your own return, what the Finance Act rates are for the year in question, and whether the twelve-month rule bites on your units.

Do not ask the distributor. Their commission structure is regulated; their tax opinion is not.

Sources

Income-tax Act, 2025, Section 224, "Tax on income of investment fund and its unit holders". Assented 21 August 2025, published in the Gazette of India Extraordinary, Part II Section 1, No. 35, and in force from 1 April 2026. Section text read from the Act as published; the department's own copy is at incometaxindia.gov.in.

Registration categories are as defined in the SEBI (Alternative Investment Funds) Regulations, 2012.

The repeal of the instrument named in Section 224(10)(a)(ii) is in the IFSCA (Fund Management) Regulations, 2025, amended up to 30 July 2025, whose repeal and savings provision repeals the IFSCA (Fund Management) Regulations, 2022: ifsca.gov.in.

General Clauses Act, 1897, Sections 3(19), 3(50), 3(51), 8 and 24, read from the text on India Code.

Related

• The three AIF categories — which one you are in decides everything above
• AIF fees and costs — tax at the fund changes the net of a gross return
• AIF risks
• Why AIF returns are not publicly comparable

Information only. Not tax advice, not investment advice, and not a substitute for professional advice on your own facts.

Checked against source on 24 August 2026. This page is information, not legal, tax or investment advice.

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