AIF category 3 can do day trading?

AIF category 3 can do intra day trading and short term investment ?
Individual can start AIF to manage his own money ?

Can check faqs here.
If one want to manage his own money then there is no need to start AIF considering the tax disadvantages and compliance that come with AIF

How can individual hire traders to manage his money.

There are many restrictions for intraday trading for companies and LLP.

Does Alternative Investments Funds can do trading in equities for day trading/intraday or short term ?

I already read those faqs it mention derivatives only.

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How much capital you are planning to start with?

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Does Intraday in equity allowed under AIF ? Or short term investment.

“Truebeacon” is AIF3 category fund .
If someone wants to invest in this . Can you pls kindly let clear the 3 points . …

(1) what is the tax liability from the Truebeacon side ?

(2) what is the tax liability from the investor side ?

(3) what is the role and implementation of TDS from/in/for both the sides i.e. Truebeacon and the investor ?


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Regarding the 1st question, this article briefly touches upon how Category 3 AIF’s are taxed

AIF Taxation

Just like the product, the taxation, too, is complex. “AIF Cat III is not a pass-through entity for taxation. Typically, the nature of income under AIF Cat III would be capital gains or business income. Income which is not under a special rate like capital gain, i.e., business income, interest, dividend, etc, would be taxed at the maximum marginal rate in AIF Cat III. For FY21, the rate would be 42.74 per cent. If business income is earned by AIF Cat III, the AIF will automatically pay a tax of 42.74 per cent (tax bracket for individuals with over Rs 5 crore taxable income). This may lead to the investor paying more tax than his tax bracket requires him to,”

This means that all the taxes that you are liable to pay due to the investment in a particular Category 3 AIF fund will be paid by the fund itself. If you want to find out specific tax rates for different kinds of incomes of Category 3 AIFs, refer to this article -

Capital gains

Type of investor Companies Firms/LLPs Others
Description Resident (%) Non-resident (%) Resident (%) Non-resident (%) Resident (%) Non-resident (%)
STCG on transfer of listed equity shares on a recognised stock exchange/to be listed equity shares or units of equity oriented mutual fund and on which Securities Transaction Tax (“ STT ”) has been paid 17.472 16.380 17.472 17.940 17.940 17.940
STCG on other securities 34.944 43.680 34.944 42.744 42.744 42.744
LTCG on transfer of listed equity shares on a recognised stock exchange/to be listed equity shares or units of equity oriented mutual fund and on which STT has been paid 11.648 10.92 11.648 11.960 11.960 11.960
LTCG on transfer of listed bonds and listed debentures 11.648 10.92 11.648 14.248 14.248 14.248
LTCG on transfer of unlisted securities 23.296 10.92 23.296 14.248 28.496 14.248

Additional indexation benefits may be available in certain instances on STCG and LTCG.

Other Income

Type of investor Companies Firms/LLPs Others
Description Resident (%) Non-resident (%) Resident (%) Non-resident (%) Resident (%) Non-resident (%)
Interest income 34.944 43.68 34.944 42.744 42.744 42.744
Dividend income 34.944 21.84 34.944 23.92 35.88 23.92

Regarding the 2nd question, as the fund is responsible for paying all the taxes, there won’t be any tax obligation arising from the investor’s side. But there can be a case where the investors earning are in the lower tax bracket (refer to this document for an overview of all tax brackets up to 5 crores). As Category 3 AIF income is taxed at the maximum rate possible (aka 42.744%), in those cases (aka when investor’s income is less than 5 crores) the investor will have to claim a refund while filing the tax return.

Regarding the 3rd question, as all tax obligations are met at the fund’s end, you can say that all the tax is deducted at source. In the second article shared above, there is also a mention about GST of 18% being levied on the performance fee charged by the fund.

I would suggest contacting the True Beacon’s team directly via their website or email as they would be able to clarify these things in a much more comprehensive manner

But if AIF is in structure of company or LLP its maximum rate would be 34-35% instead of 42.74. Correct?

Yes, the 42.744% rate was for individuals (shown in the Others column in the tables above). Company/LLP tax rates are lower as you mentioned

In one of the articles that I shared above, it also mentions about a way for closed-ended Category III AIFs (doesn’t apply to True Beacon) to have pass-through tax status if structured in a particular manner

Category III AIFs do not have a pass-through status under law; however, in respect of closed-ended Category III AIFs, it may be possible to structure them as a determinate private trust and achieve a simulated pass-through status for them (in which case taxation would be similar to that of Category I and II AIFs as discussed above). Taxation in respect of Category III AIFs is relatively complicated and may require specialised advice.

Yes but according to my knowledge most of them AIF register themselves as trusts , i think to avoid compliance’s, but I also wonder that it has effects on increase in income taxes paid so isnt it really better to structure them as companies.

There was a misunderstanding. When I was referring to the tax rates above, they were for investors in an AIF. The tables that were shared above showcasing the different tax rates are for types of investors that invest in an AIF. I wasn’t referring to tax rates on the AIF itself based on its structure (aka weather it being LLP, company, trust). Indeed most AIFs are structured as trusts due to the various benefits like lower compliance requirements (as mentioned in this article)

A distinct tax pass through was incorporated in the Indian Income Tax Act, 1961 by the Finance Act, 2015 for Category I and Category II AIFs, irrespective of the legal form in which such AIFs are set up. However, this did not take away the preferential value of a trust structure for AIFs in India, because while companies and LLPs are subject to numerous governance and compliance requirements under the Companies Act, 2013 and LLP Act, 2008, the Trusts Act offers the manager (or ‘GP’) team the ability to incorporate bespoke terms of governance for an AIF which is set up as a trust, as may be agreed between the GP and the investors (or ‘LPs’) of the AIF.

But your concern regarding AIFs set up as Company/LLP having a lower tax outgo is accurate. Still, the majority of the AIFs prefer to be set up as trusts because of various disadvantages that arise when setting up as a Company or LLP. There is an article which dives deep into the advantages and disadvantages of various structures used by AIFs.

2.2 How are these alternative investment funds typically structured?

Under the AIF Regulations, an AIF can be structured in the form of a limited liability partnership, company, body corporate or trust. Typically, the trust is the preferred structure, due to ease of management and administration – in contrast to companies and limited liability partnerships (LLPs), which are subject to stringent and restrictive governance and compliance requirements under the Companies Act, 2013 and Limited Liability Partnership Act, 2008 respectively.

2.3 What are the advantages and disadvantages of these different types of structures?

Trusts: The advantages are as follows:

  • They are easy to set up and wind up.
  • They offer broad flexibility in relation to their commercial objectives.
  • There are minimal statutory disclosure requirements, as compared to a company or LLP.
  • Regulatory compliance under the Trusts Act is minimal compared to the LLP Act or the Companies Act, resulting in much lower costs of running the AIF.

The disadvantage is that they can be subject to tax at a maximum marginal rate if the trust is a discretionary trust or if the beneficial interest of the investors is indeterminate, as in the case of hedge funds.

LLPs: The advantages are as follows:

  • They have a separate legal identity and perpetual succession.
  • The liability of all partners is limited to the extent of their capital contribution.
  • There are fewer compliance requirements compared to a company.
  • There is no maximum limit on the number of partners, subject to the maximum limit of investors (1,000) under the AIF Regulations, and there is no need to engage a trustee for the AIF.

The disadvantages are as follows:

  • The sponsor or manager of the AIF must be appointed as a designated partner and the designated partners have unlimited liability to ensure that the partnership complies with all applicable laws.
  • In case of fraud against creditors of the LLP, the personal assets of the partners may also be attached to satisfy the claims of defrauded creditors.
  • Certain onshore financial institutions cannot invest in an LLP, which limits the scope for raising capital.
  • LLPs with foreign partners are subject to certain exchange control restrictions on investments in investee companies. In sectors where 100% foreign direct investment (FDI) is permitted under the automatic route and which have prescribed conditions such as minimum capitalisation, LLPs cannot bring FDI without prior governmental approval. Further, downstream investment by LLPs involves certain additional compliance requirements.
  • The setting up and winding up of an LLP can take much longer compared to a trust.

Company: The advantages are as follows:

  • It has a distinct legal identity and perpetual succession.
  • The liability of the shareholders is limited to the extent of their investment.
  • There is separation of ownership and management, as the management is vested in the board of directors of the company.

The disadvantages are as follows:

  • There are more stringent compliance and reporting requirements.
  • Additional compliance requirements result in higher costs.
  • The company must abide by stricter accounting and auditing requirements.
  • The setting up and winding up of a company can take much longer compared to a trust.


No tax pass-through has been granted to Category III AIF due to which the income from the investment of these funds is taxed twice:

  • Firstly when such income arises or accrues in favour of the AIF
  • Secondly when such income accrues or arises in the favour of individual investor.
  • TDS for Category III AIFs registered with SEBI will be withheld @10% to tax residents

Income of a category III AIF is usually taxed as business income, although there can also be a capital gains component. As a result, the tax paid is, typically, at the highest tax slab, including surcharge of 42.7%, and is deducted before the returns are paid out.

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Can you please answer this ?

I recently came across a news article which talks about a newly set up hedge fund that is using LLP structure -

Dolat Capital Market has launched the country’s first hedge fund under Category-III Alternative Investment Fund on LLP (limited liability partnership) structure which attracts a lower tax of 35 per cent.