According to www.livemint.com, the Corporate Laws (Amendment) Bill, 2026 — currently before Parliament’s Joint Parliamentary Committee — would allow Securities and Exchange Board of India (Sebi)-regulated trusts to convert into limited liability partnerships (LLPs), reducing the effective tax rate for Category III alternative investment funds (AIFs) from 39% to 35%.
Tax Burden and Structural Bottleneck
Category III AIFs — which deploy high-risk, leveraged trading strategies in private equity, hedge funds, and other non-traditional assets — are taxed at the fund level rather than enjoying pass-through status. As a result, they face an effective tax burden of up to 39%, composed of a 30% base tax, 25% surcharge, and 4% cess on income exceeding ₹2 crore in fiscal year 2026 (FY26). In contrast, Category I and II AIFs pay 12.5% on long-term capital gains and 20% on short-term gains.
This disparity stems from a 2014 Central Board of Direct Taxes (CBDT) circular stating that trusts lacking clearly identified beneficiaries — including many Category III AIFs — are treated as indeterminate and taxed at the maximum marginal rate (MMR). Even determinate trusts earning business income remain subject to MMR under the same circular, creating persistent structural friction.
LLP Conversion Pathway
The bill introduces the first statutory framework enabling Sebi-regulated trusts to convert into LLPs — a structure assessed at a flat 30% corporate tax rate, yielding an effective rate of 35% after surcharge and cess. According to S.R. Patnaik, partner and head of taxation at Cyril Amarchand Mangaldas, “It is pertinent to note that even a determinate trust may attract the maximum marginal rate on business income, whereas an LLP is assessed at a rate of 30%, representing a rate advantage for funds with significant business income.”
Category III AIFs raised commitments totaling ₹3.15 trillion as of March 2026, per Sebi data. The tax arbitrage between MMR and LLP structures — estimated by experts at over 3–5% — makes conversion financially compelling for many funds. Sameer Gupta, national tax leader at EY India, noted that Category III AIFs pursuing long-short strategies have historically preferred LLPs where feasible due to lower tax incidence and greater certainty.
Confidentiality Trade-Off and Selective Adoption
However, the LLP route carries operational trade-offs. Unlike trusts, LLPs require public disclosure of partner identities — undermining investor confidentiality, a key feature valued by high-net-worth individuals and institutional investors. An anonymous AIF executive confirmed, “Category III funds are the most excited to change to an LLP,” while acknowledging that foreign limited partners in some Category I and II funds also see merit in LLP flexibility.
Sumeet Hemkar, partner at Deloitte India, emphasized that fund managers will weigh multiple factors before converting: tax neutrality of the transition, treatment of carried interest and investor distributions, operational complexity around investor admission and exit, investor preferences, and transition costs. “If transition costs outweigh the benefits, existing large funds may continue with the trust structure. Consequently, we may witness selective migration rather than an industry-wide shift,” he said.
Carried Interest Remains Unresolved
Critically, the bill does not address carried interest — the performance-based share of profits earned by fund managers — which remains in a legal grey area. Neither the Income-tax Act nor the Goods and Services Tax (GST) law explicitly defines its tax treatment, raising concerns that tax authorities could recharacterize carry as service income rather than investment income. Industry stakeholders had hoped the bill would clarify this issue; instead, it focuses solely on enabling LLP conversion without prescribing how carried interest should be taxed.
The absence of carried interest resolution underscores a broader gap: while the bill alleviates one structural tax inefficiency, it leaves untouched the most contentious and high-stakes tax uncertainty facing fund managers across all AIF categories. As of July 2026, no legislative or regulatory guidance has been issued to resolve this ambiguity.
Source: livemint.com
Compiled from international media by the SCI.AI editorial team.
