There is a good news for the AIF industry. In a recent circular, the Central Board of Direct Taxes (CBDT) has clarified that there will be no tax on NRIs investing overseas through category I and II AIFs
such as venture capital funds, private equity funds or debt funds.
So far, any income received or accrued in India by a non-resident in India was subject to tax in India. CBDT said, “The matter has been considered by the Board. As section l1SUB(I) of the act provides that the investments made by category i or category II AIFs are deemed to have been made by the investor directly, it is hereby clarified that any income in the hands of the non-resident investor from off-shore investments routed through the category i or category II AIF, being a deemed direct investment outside India by the non-resident investor is not taxable in India under section 5(2) of the Act.”
Further, the government has clarified that NRIs cannot set off losses through such investment. “It is further clarified that loss arising from the off-shore investment relating to non-resident investor, being an exempt, shall not be allowed to be set-off or carried-forward and set off against the income of the Category I or Category II AIF.”
Experts believe that the move eliminates double taxation on NRIs both at the India level and their country of residence.