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  • Vivriti Debt ++ Income from transfer of Cat I and Cat II AIFs will be considered capital gains

    Income from transfer of Cat I and Cat II AIFs will be considered capital gains

    The Union Budget of India has clarified the government’s stance on taxation of AIFs.
    Kushan Shah Feb 3, 2025

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    The latest Union Budget of India has made many announcements related to AIFs. It has clarified that any income generated from transfer of Cat I and Cat II AIFs will be considered capital gain and will be taxed accordingly. This is aimed to provide clarity on whether income generated through transfer of Cat I and Cat II AIFs is business income or capital gain.

    However, since Cat I and Cat II are pass through vehicles, there will be no tax at a fund level. Investors will have to pay capital gains tax at redemption.

    This provision will come into effect from April 1, 2026 and will be applied from assessment year 2026-27 onwards.

    Further, the Union Finance Minister Nirmala Sitharaman has proposed setting up of another Fund of Fund (FoF) to support venture capital and private equity funds. The finance minister said, “The Alternate Investment Funds (AIFs) for startups have received commitments of more than Rs. 91,000 crore. These are supported by the Fund of Funds set up with a government contribution of Rs. 10,000 crore. Now, a new Fund of Funds, with expanded scope and a fresh contribution of another Rs. 10,000 crore will be set up.”

    The finance minister has also announced that the government is exploring a deep tech FoF which will be aimed to boost start-ups in the next generation technology space like AI.

    Here is what AIF industry said about the budget:

    Anirudh A. Damani, Managing Partner, Artha Venture Fund

    The renewal of the Rs.10,000 crore Fund of Funds and the focus on deep-tech funding will provide much-needed capital to early-stage ventures and India’s next wave of innovation. This is the first full-fledged budget of the Modi government’s third term, and it has delivered on the needs of the economy, startups, and investors alike.

    Chirag Shah, Investment Professional, BlackSoil Capital

    The Rs. 10,000 crore boost to the Fund of Funds scheme in the Union Budget 2025 is set to drive innovation across sectors like fintech, health tech, and clean energy, providing crucial support for early-stage startups that face difficulties securing private investments. By routing funds through SEBI-registered AIFs, the government leverages the expertise of professional fund managers, minimising the risk of inefficient capital allocation and reaffirming its confidence in startups as engines of economic growth and job creation. The scheme's long-term success will hinge on sectoral priorities, regulatory reforms, and infrastructure, shaping India's position in the global startup arena.

    Bruce Keith, Co-founder & CEO, InvestorAi     

    The crucial fund of funds of Rs 10,000 crore will play a key role in boosting domestic capital in the startup sector. The announcement on deep tech fund, while details are awaited, it should be viewed through the DeepSeek lens of what can be done with relatively small amounts of capital when provided to agile and creative teams. We expect the VC ecosystem to bring velocity and momentum into funding these enterprises.

    Sridhar Parthasarathy, Co-Founder & General Partner, Bluehill.VC

    While equity funding through AIFs is essential, there is an  urgent need for debt financing for startups. The introduction of a credit guarantee will help startups achieve a balanced mix of equity and debt funding, making their growth more sustainable.

    Dinesh Arjun, CEO & Co-founder, Raptee.HV 

    Innovation and technology are the cornerstones of every developed nation, and India's vision for Viksit Bharat rightly prioritizes these pillars. The Finance Minister’s focus on nurturing and investing in innovation is a commendable step toward accelerating new technologies that will shape our future. The allocation of a Deep Tech Fund will further strengthen India’s industrial ecosystem, fostering a globally competitive, tech-driven economy.

    Pankit Desai, Co-founder & CEO, sequretek

    With the unveiling of the Union Budget 2025, significant advancements in artificial intelligence come into focus, particularly with the creation of National Centers of Excellence (COEs) in AI. This shift signals a groundbreaking transition from AI being a mere boardroom discussion to becoming a central budgetary focus, complete with serious financial commitments. By earmarking funds specifically for deep tech, the government is actively fostering an environment ripe for innovation, acknowledging the high-risk nature of such investments, and putting resources right where they're most needed.

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