252 lines
11 KiB
PHP
252 lines
11 KiB
PHP
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@extends('Frontend.layouts.master')
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@section('content')
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<!--add html content-->
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<div class="inner-banner">
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<div class="container">
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<div class="banner-content">
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<div>
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<h2>Blogs</h2>
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<!--<p>India’s First Secondary Transactions<br> Platform for Alternative Assets. </p>-->
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</div>
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<img src="{{imagePath('public/assets/media/FrontendImages/menu-logo.png')}}">
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</div>
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</div>
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</div>
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<div class="blog-container">
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<div class="container">
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<h4 class="fw-semibold">Taxation of Alternative Investment Funds: An Investor's Guide</h4>
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<p class="mb-2">
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Alternative Investment Funds (AIFs) are a relatively new category of investment funds in India,
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regulated by the Securities and Exchange Board of India (SEBI). AIFs are a type of privately pooled
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investment vehicle that invests in assets other than traditional securities such as stocks, bonds, and
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money market instruments.
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These funds are designed for sophisticated investors who are willing to
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take on higher risk and potentially earn higher returns than traditional investments.
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</p>
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<p class="mb-1">
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AIFs are classified into three categories based on their investment strategies and risk profiles:
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</p>
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<ul class="mb-2">
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<li class="mb-1">
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<strong>Category I AIFs:</strong>
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AIF that invest in early-stage start-ups, SMEs, and social ventures that the
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government or regulators consider socially or economically desirable.
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</li>
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<li class="mb-1">
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<strong>Category II AIFs:</strong>
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These funds invest in private equity, debt or other securities of companies,
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asset securitization or any other structure as permitted under SEBI regulations. Category II AIF
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are AIFs which does not fall in Category I and III and which do not undertake leverage or
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borrowing other than to meet day-to-day operational requirements.
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</li>
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<li class="mb-1">
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<strong>Category III AIFs: </strong>
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These funds use complex trading strategies such as leverage, short-selling,
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and derivatives to generate high returns.
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</li>
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</ul>
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<h5 class="fw-semibold">Taxation of Category I and Category II AIF</h5>
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<p>
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When it comes to taxation, Category I and II AIFs have a
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pass-through status
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. This means that any
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income (except for business income) that the fund generates, is taxed to the investor and not to the
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fund house - even if the investor has not redeemed the investment. T
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he investors need to pay taxes
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according to their respective tax slabs.
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</p>
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<div class="taxation">
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<table class="mt-3 w-100">
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<tbody>
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<tr>
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<th>Nature of Income earned by the Fund</th>
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<th>Taxability</th>
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<th>Tax Rate</th>
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</tr>
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<tr class="bg-white">
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<td>Other than business income ( For example capital gains )</td>
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<td>Passed through - AIF does not pay any tax. The unit holder pays the tax</td>
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<td>Rates applicable to the unit holder</td>
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</tr>
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<tr>
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<td>Business Income</td>
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<td>Taxed at AIF. Such income is not taxable for unit holders</td>
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<td>
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AIF was formed as a company or LLP. Taxed at the rates applicable to the company or the LLP. <br><br>
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AIF formed as Trust: Taxed at Maximum Marginal Rate*.
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</td>
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</tr>
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</tbody>
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</table>
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<p>*Maximum Marginal Rate for business income as per the latest tax rates enacted as of 2020 is 42.744%.</p>
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</div>
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<p>
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Therefore, if you invest in category I and II AIF, you need to pay capital gain tax on the profit or loss
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you make from the AIF funds within a given duration. The duration here is important to understand
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whether long-term capital gain tax or short-term capital gain tax would be applied. As per the
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recent rules for LTCG, 20% is the rate of tax with indexation benefit. If the profits are taxed as STCG,
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then the rate would be 15%. There is a surcharge, and cess charges on and above-mentioned tax
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rates as well. Additionally, in case of
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non-resident
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investors beneficial tax rate of 10% is provided
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for the long-term capital gains arising on transfer of unlisted securities or shares of a company not
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being a company in which the public are substantially interested subject to the condition that the
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indexation and foreign exchange fluctuation benefits would not be available.
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</p>
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<p>
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The CBDT has provided a clarification vide circular dated 3 July 2019 that any
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<strong>income in the
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hands of a non-resident investor from offshore investments </strong>
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routed through the Category I or
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Category II AIF, being a deemed direct investment outside India by the non-resident investor, is not
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taxable in India under the provisions of the ITA. The CBDT further clarifies that loss arising from
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the offshore investment relating to non-resident investor, being an exempt loss, shall not be
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allowed to be set-off or carried-forward and set off against the income of the Category I or Category
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II AIF.
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</p>
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<p>
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<strong>
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Section
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194LBB
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-
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Tax
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deducted
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at
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Source
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on
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Income
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(other
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than
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business
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income)
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distributed by Category I and II AIF:
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</strong>
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</p>
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<div class="taxation">
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<table class="mt-3 w-100">
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<tbody>
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<tr>
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<th>Investor Type</th>
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<th>Withholding Tax Rate</th>
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</tr>
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<tr class="bg-white">
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<td>Resident</td>
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<td>10%</td>
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</tr>
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<tr>
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<td>Non-Resident </td>
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<td>
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Rates in Force
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as specified in the Finance Act of the relevant year (Currently 30%)
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or rates specified in the applicable Double Tax Avoidance Agreement
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(DTAA) entered between India and the country of residence of such
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non-resident investor
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</td>
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</tr>
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</tbody>
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</table>
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<p>Investors are entitled to claim credit of taxes so withheld by the Investment Fund in their respective returns of income which are to be filed under the ITA.</p>
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</div>
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<h5 class="fw-semibold">Taxation of Category III AIF</h5>
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<p>
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Unlike Category I and II, there is no pass-through status for Category III. This category is taxable at
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the fund level.
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Category III AIFs are taxable at the highest
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income tax slab
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level (42.7%) at the fund
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level. The returns given to investors are after deducting the tax. The tax rates applicable to the AIF is
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as follows.
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</p>
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<div class="taxation">
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<table class="mt-3 mb-3 w-100">
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<tbody>
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<tr>
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<th>Tax type</th>
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<th>Short-Term Capital Gains</th>
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<th>Long-Term Capital Gains</th>
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<th>Business Income</th>
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<th>Dividend Income</th>
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</tr>
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<tr class="bg-white">
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<td>Basic tax</td>
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<td>15%</td>
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<td>10%</td>
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<td>30%</td>
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<td>30%</td>
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</tr>
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<tr>
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<td>Surcharge</td>
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<td>15%</td>
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<td>15%</td>
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<td>37%</td>
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<td>37%</td>
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</tr>
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<tr class="bg-white">
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<td>Education Cess</td>
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<td>4% </td>
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<td>4% </td>
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<td>4% </td>
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<td>4% </td>
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</tr>
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<tr>
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<td>MMR</td>
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<td>17.94%</td>
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<td>11.96%</td>
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<td>42.74%</td>
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<td>42.74%</td>
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</tr>
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</tbody>
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</table>
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</div>
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<h5 class="fw-semibold">Taxation of Secondary Transfer of AIF units by investors</h5>
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<p>
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When an investor exits an AIF by a transfer of units or partnership interests to another investor
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(this transaction is called a
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‘secondary transfer’
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), gains on sale of units may be taxable directly in
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the hands of the investors. The taxability will depend on the holding period of AIF units.
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</p>
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<div class="taxation">
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<table class="mt-3 w-100">
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<tbody>
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<tr>
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<th>Instrument </th>
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<th>Period Holding </th>
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<th>Type of Gain</th>
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<th>Tax Rate</th>
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</tr>
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<tr class="bg-white">
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<td class="border-bottom-0">Units of AIF</td>
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<td>Up to 36 Months </td>
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<td>Short Term Capital Gain </td>
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<td>Slab Rates</td>
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</tr>
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<tr>
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<td class="border-0 bg-white"></td>
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<td>More than 36 Months </td>
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<td>Long Term Capital Gain </td>
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<td>20% with Indexation</td>
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</tr>
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</tbody>
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</table>
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</div>
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</div>
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</div>
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@endsection
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