The trust form is not chosen for its tax treatment. Section 115UB extends the pass-through to a fund established as "a trust or a company or a limited liability partnership or a body corporate", without distinction.
The difference lies in the compliance calendar. A company or an LLP carries a Ministry of Corporate Affairs layer that runs on a schedule rather than on activity, while the SEBI and income-tax obligations that bind an AIF are identical across the three forms.
Does the regulation prefer one form? #
Regulation 4 sets out the eligibility conditions, and two of them are framed identically for every vehicle.
- The constitutional document — the memorandum of association of a company, the Trust Deed of a trust, or the Partnership deed of an LLP — must permit the applicant "to carry on the activity of an Alternative Investment Fund".
- That same document must prohibit the applicant "from making an invitation to the public to subscribe to its securities".
One further condition then attaches to each form. A trust: the instrument must be in the form of a deed and duly registered under the Registration Act, 1908. An LLP: incorporated, with the partnership deed filed with the Registrar under the Limited Liability Partnership Act, 2008. A body corporate: established under a Central or State statute.
The regulation expresses no preference among them. The choice is determined elsewhere.
Is a trust chosen for the tax? #
The explanation commonly given is that the trust form secures pass-through treatment. Section 115UB does not support it.
Explanation 1(a) to section 115UB defines an "investment fund" as a fund established or incorporated in India as "a trust or a company or a limited liability partnership or a body corporate" holding a Category I or Category II registration. The treatment follows the category, not the vehicle. s.115UB
The mechanics of the pass-through are worth setting out, because they are frequently described incorrectly. Two clauses of section 10 operate in opposite directions:
| At the fund | In the investor’s hands | |
|---|---|---|
| Non-business income capital gains, interest, dividend | Exempt under s.10(23FBA) | Taxed, through the s.115UB pass-through |
| Business income | Taxed at the fund | Exempt — s.10(23FBB) |
Each rupee is therefore taxed once. Which end it is taxed at follows from its head of income rather than from any election.
Category III sits outside this regime. It is not named in section 115UB, so it is not an "investment fund" and there is no pass-through. A Category III trust is assessed through its trustee as a representative assessee, and the income is taxed at fund level rather than in the investor's hands. Section 161(2) prevents a second assessment: a person assessable as a representative assessee for income "cannot be assessed on that same income under any other provision of this Act".
Two provisions determine the rate at fund level. Under section 161(1A), where the income includes profits and gains of business, tax is charged on the whole of that income at the maximum marginal rate. Where it does not, section 164 governs, and the outcome turns on whether the trust is determinate.
scope of 161(1A)
Section 161(1A) applies only where the income includes profits and gains of business. A fund earning capital gains and dividends does not fall under it automatically. Whether a trading strategy produces business income is fact-dependent, which is why two Category III funds may be taxed differently on comparable portfolios.
What a company must do on every capital call #
A company or an LLP is a regulated vehicle in its own right, and the obligations that matter are not the annual ones. They attach to the events a fund runs on.
| Registered valuer’s report fixing the price | s.62(1)(c), r.13 |
|---|---|
| Special resolution, 75%, with allotment inside 12 months of it | s.62(1)(c) |
| Application money into a separate scheduled bank account, usable only for allotment or refund | s.42(6) |
| Allotment within 60 days; failing that, repayment within 15 days with interest at 12% per annum from day 61 | s.42(6) |
| Return of allotment filed within 15 days of allotment | s.42(8) |
| The money may not be used until allotment is made and that return is filed | proviso to s.42(4) |
The last of these is the operative constraint. Capital called to fund a transaction cannot be deployed until the filing with the Registrar is complete. For a fund drawing down six times a year, the sequence runs six times.
A ceiling that sits below the one SEBI sets
Private placement may be made to no more than two hundred persons in a financial year, per kind of security, excluding qualified institutional buyers and employees holding options. SEBI permits one thousand investors per scheme, with accredited investors excluded from that count.
A company-form AIF therefore cannot use the headroom its own regulator allows. This is a structural limit rather than a filing burden, and it is the clearest single consequence of the choice.
Returning capital, and what the trust does instead #
Returning money to investors does not fit the form
A dividend may be declared only out of profits for the year after depreciation, or out of
undistributed profits of earlier years after depreciation. A return of capital following an
exit is not profit, and cannot be paid as a dividend. Returning capital is instead a
reduction of capital, which requires a special resolution and confirmation by the National
Company Law Tribunal; the Tribunal may confirm only where every creditor’s claim has
been discharged, determined, secured or consented to, and where the auditor has certified the
accounting treatment. A buy-back under section 68 is the alternative, within its own quantitative
limits.
and the dividend machinery itself
A declared dividend goes into a separate scheduled bank account within five days
(s.123(4)). Amounts unpaid after thirty days move to an Unpaid Dividend Account within seven
days (s.124(1)). Unclaimed for seven years, the money and the related shares transfer to the
Investor Education and Protection Fund (s.124(5) and (6)). Non-payment within thirty days carries
interest at 18% per annum and director liability under s.127.
A distribution waterfall that returns capital before gains has no natural expression in any of these mechanisms.
In an LLP, every investor is a partner
Admission or cessation of a partner requires a filing within thirty days, and each change to the LLP agreement requires its own. At a fund admitting investors across several closes, the partner register and the investor register are the same thing, and every movement in it is a filing.
What the trust does instead
Units are allotted under the contribution agreement and the trust deed, and distributions follow the waterfall in the fund documents. Neither is a filing to the Ministry of Corporate Affairs, and neither requires a valuation report, a special resolution, a tribunal or a separate statutory bank account. Operational authority sits with the Trustee, who delegates it to the Investment Manager under the Investment Management Agreement; reporting to government authorities is largely confined to formation and winding up.
The obligations that bind an AIF are the same across all three forms. A company or an LLP adds the layer above an identical base, and the consequences are operational rather than fiscal: faster and cheaper formation, and an accounting treatment not required to fit a statutory share-capital model.
Launching schemes within a registered trust #
The structural consequence is set out in Regulation 12, and it is often overlooked.
Once the trust holds its registration, a further scheme is launched by filing rather than by registering again. The placement memorandum is filed with the Board together with the scheme fee. Where the fund type and the investment theme are unchanged, this is a materially lighter process than a fresh registration.
The operative details:
- No scheme fee is payable on the first scheme launched by the AIF.
- The filing is made through a merchant banker, at least ten working days before launch.
was thirty until Jul 2026
"Thirty" was substituted with "ten working" on 14 July 2026. Material written before that date states thirty days, as does a good deal published since. - The Board may communicate comments, and the merchant banker or the Manager must ensure they are complied with.
- An Accredited Investors only fund falls outside the merchant banker filing and the comment cycle.
- Where first close is not declared in the specified manner, a fresh application must be filed and the scheme fee paid again.
Common errors #
Attributing the pass-through to the trust form
Section 115UB names all four vehicles. A structure described as having been chosen for pass-through reasons has been explained on a basis the Act does not provide.
Reversing the two heads of income
Non-business income is exempt at the fund and taxed in the investor's hands; business income is taxed at the fund and exempt in the investor's hands. Reversing them places the liability in the wrong set of books.
Treating determinacy as a formality
Under the Explanation to section 164, the shares of beneficiaries are treated as indeterminate unless the instrument expressly names the beneficiaries and their individual shares and they are identifiable on the relevant date. For an AIF the beneficiary set changes at each close, so the date condition carries weight.
Overlooking the two Regulation 4 conditions in the deed
The trust deed must permit the activity and must prohibit a public invitation. Both sit in a document often drafted before the SEBI application was contemplated, and both are tested at registration.
Common questions #
Can an AIF be a company or an LLP?
Yes. Regulation 4 contemplates a company, a trust, an LLP and a body corporate, and section 115UB extends the same pass-through to Category I and Category II in any of those forms. Most Indian AIFs are nonetheless constituted as trusts, for the operational reasons set out above.
Does a Category III AIF receive pass-through treatment?
No. Section 115UB covers Category I and Category II only. A Category III fund is taxed at fund level, and section 161(2) prevents the same income being assessed again on the investor.
What is a contributory trust?
A trust whose beneficiaries are the investors who have contributed capital to it, holding units representing their respective shares. The Trustee holds legal title; the Investment Manager operates the fund under the Investment Management Agreement.
Must the trust deed be registered?
Yes. Regulation 4(c) requires the instrument of trust to be in the form of a deed and duly registered under the Registration Act, 1908.
Is a separate SEBI registration required for each scheme?
No. Under Regulation 12 a scheme is launched by filing a placement memorandum with the Board together with the scheme fee, through a merchant banker, at least ten working days before launch.
Continue the series
Read the source
Fundclair maintains the investor register, the capital account and the reporting for AIFs constituted on this model, so that the flexibility of the trust form does not become an unauditable spreadsheet. See how it works