How is a Category II AIF taxed, and does structure change it?

Pass-through under Section 115UB, and no, structure does not change it. Income other than business income is exempt at the fund level and taxed in investors' hands with character preserved, whether the fund is a trust, LLP, or company. Business income is taxed at the fund level. The Finance Act, 2025 amendment to Section 2(14), effective 1 April 2026, confirms that securities held by such funds are capital assets, so gains are capital gains rather than business income.

How is a Category III AIF taxed compared to Category I and II?

At the fund level, not on a pass-through basis. Category III AIFs do not get Section 115UB pass-through, so the fund pays tax on its income before distributing to investors. Where structured as a trust, the rate can reach the MMR of roughly 42.74% if the trust is treated as indeterminate, which is why the determinacy question and the LLP alternative matter for Category III.

How does the Finance Act 2026 buyback reclassification affect the LLP versus trust choice?

It makes the LLP more attractive for Category I and II funds with portfolio companies likely to pursue buybacks. Before 2026, buyback proceeds were taxed as dividend income at slab rates of up to 30% plus surcharge in investors' hands. The Finance Act, 2026 reclassifies them as capital gains. For an LLP-structured AIF passing long-term capital gains through to investors, the rate drops to 12.5% (or 20% for other assets). The change does not affect the structure decision for most Category III funds, which are taxed at the fund level regardless, but for a Category I or II fund with a growth-equity or PE strategy where buyback exits are common, the LLP's pass-through now delivers a materially better after-tax outcome than before.

Is the indeterminate trust risk still live after the Delhi High Court ruling?

It is reduced but not eliminated. The Delhi High Court in Equity Intelligence AIF Trust held that non-naming of beneficiaries does not by itself make a Category III AIF indeterminate, and read down CBDT Circular No. 13/2014. As a High Court decision the department can continue to litigate the point, so a well-drafted deed with ascertainable shares is the conservative position, and an LLP avoids the question entirely.

How long does it take to register an AIF with SEBI?

Typically three to five months from filing, depending on category and documentation. SEBI moved to a fast-track mechanism in April 2026 allowing schemes to proceed 30 days after filing unless objections are raised, and has proposed a further green-channel framework (GARUDA) to compress timelines for sophisticated-investor and accredited-investor schemes.

What documents are needed to set up and register an AIF?

The constitutive document (registered trust deed, LLP agreement, or memorandum and articles), the private placement memorandum, Form A, KYC documents for the entities in the structure, declarations and undertakings, and the prescribed fee. The constitutive document must prohibit any invitation or solicitation to the public to subscribe to its securities.

Can NRIs and foreign investors invest in a domestic AIF, and does structure affect that?

Yes, subject to RBI and Foreign Exchange Management Act (FEMA) 1999 rules, and structure can affect onboarding friction. Foreign capital comes in through the permitted routes under the consolidated FDI policy and FEMA. Offshore institutional LPs often find an LLP or company more familiar than a trust during diligence, a practical reason to consider the LLP where the fund targets foreign capital.

How does a GIFT City IFSC AIF differ on structure and tax?

Same three forms, but regulated by IFSCA and managed by an FME, with significant non-resident tax exemptions. Under Section 10(4D), several income streams attributable to non-resident investors are exempt, and Category I and II IFSC AIFs offer pass-through plus a 10-year business-income tax holiday. Non-residents earning only from a Category I or II IFSC AIF are exempt from filing an Indian return and from holding a PAN, provided tax is deducted on distributions.

Can a fund set up as a trust later convert to an LLP?

Not yet through a settled statutory route, but a proposed one is in train. The Corporate Laws (Amendment) Bill, 2026 proposes Section 57A of the LLP Act, 2008, creating a conversion route for a specified SEBI or IFSCA registered trust into an LLP. The Bill has been referred to a JPC and is not yet law, the resulting LLP's partners must be the trustees, three-fourths investor consent is required, and pre-conversion trustee liability is preserved.

If we convert under section 57A, does it trigger a taxable transfer?

The conversion is designed to operate by statutory vesting without recreating the vehicle, but the conversion-specific tax neutrality treatment is still under deliberation. The Bill provides that the trust's assets vest in the LLP without further act or deed and the trust is deemed dissolved. Confirm the precise tax-neutrality position, including any provision under Section 47 of the Income-tax Act, once the Bill is enacted before relying on it.

How does winding up differ across the three structures?

The grounds are set by Regulation 29 of the AIF Regulations, and the process follows the governing law of the form. For all three forms, a fund must wind up when its tenure expires or when investors holding 75% of the value of units pass a resolution to do so, or if directed by SEBI. A trust has one additional ground: the trustees can themselves resolve to wind up if they consider it in investors' interest. An LLP winds up under the LLP Act, 2008 after that; a company under the Companies Act, 2013. Trustees commonly retain a reserve against tax liability before final distribution.

Does the company structure ever make sense for an AIF?

Rarely, and mainly where profit is retained rather than distributed. Because dividend distributed by a company is taxed again in the investor's hands, the company form suits stakeholders who do not draw profits regularly. A fund built to return capital usually finds a trust or LLP more efficient.

We are a Category II fund raising only from domestic family offices. Trust or LLP?

A trust, in most cases. The pass-through is identical to an LLP, and the trust gives faster setup and investor privacy without public filing of beneficiary identities. The LLP becomes the better answer when offshore institutional capital enters the picture, or when you specifically want the partnership governance model.

Does structure affect the minimum corpus or investor commitment?

No. The Rs. 20 crore minimum scheme corpus (Rs. 10 crore for angel funds) and the Rs. 1 crore minimum investor commitment apply regardless of whether the AIF is a trust, LLP, or company. Each scheme is also capped at 1,000 investors (200 for an angel fund). Structure changes tax, governance, and winding up, not these SEBI eligibility thresholds.

We have offshore LPs and want a Category I venture fund. Domestic LLP or GIFT City?

Evaluate GIFT City seriously before defaulting to a domestic LLP. For a fund built around offshore capital, the IFSC non-resident exemptions under Section 10(4D), the return-filing and PAN relief, and the absence of STT and GST on IFSC-exchange trades often outweigh the domestic structure question. The trust-versus-LLP choice still applies within GIFT City, but the domicile decision usually has the larger effect on investor after-tax returns.

Home > Finance > AIF Trust vs LLP vs Company Structure in India – Which Fits your Fund?

AIF Trust vs LLP vs Company Structure in India – Which Fits your Fund?

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June 18,
2026

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June 18, 2026
16:23

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When choosing a legal structure for investment funds in India, three prominent options are AIF Trust, LLP, and Company structure. AIF (Alternative Investment Fund) Trusts offer flexibility and tax benefits, making them an advantageous choice for private equity and venture capital funds. LLPs (Limited Liability Partnerships) combine the benefits of partnership and corporate structures, suitable for those seeking limited liability with operational flexibility. Traditional Company structures provide a well-established framework ideal for larger organizations but come with more regulatory compliance. Each structure has its pros and cons, and the right choice depends on the fund's objectives, desired governance, and investor requirements. Understanding these differences is crucial for aligning the legal framework with the fund's strategic goals.

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AIF Trust vs LLP vs Company Structure in India – Which Fits your Fund?

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June 18, 202616:23

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June 18,
2026

June 18, 2026
16:23