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

AIF trust, LLP, or company: the Securities and Exchange Board of India (SEBI) permits all three as valid legal structures for Alternative Investment Funds under the SEBI (Alternative Investment Funds) Regulations, 2012. For over a decade, the private trust won that decision by default: it was faster to set up, operationally flexible, and tax-neutral for Category I and II funds. That default is no longer obvious. The Corporate Laws (Amendment) Bill, 2026, tabled in the Lok Sabha on 23 March 2026, introduces a statutory framework for trust-to-LLP conversion and creates a dedicated “Specified IFSC LLP” category for GIFT City funds. The Finance Act, 2026 simultaneously extended pass-through equivalence to LLP-structured funds under Sections 10(23FBA) and 115UB of the Income Tax Act, 1961. For fund managers choosing a structure today, all three options deserve a clean-sheet analysis.

What are the three legal forms an AIF can take in India?

An AIF in India can be a private trust, a limited liability partnership, or a company. The trust is the most widely used form, with the overwhelming majority of SEBI-registered AIFs adopting it. The LLP is a distant second, with some traction in Category III and GIFT City funds. The company form is uncommon and used only in specific institutional contexts.

Under each form, the fund still requires a sponsor, an investment manager, and, in the case of the trust, a trustee. The sponsor is required to maintain a continuing interest equal to 2.5% of the corpus or ₹5 crore, whichever is lower (Regulation 10, SEBI AIF Regulations, 2012). This sponsor commitment requirement applies regardless of legal form.

The key differences between the three forms show up in four places: governance flexibility, tax treatment, LP familiarity, and formation and ongoing compliance cost. Each of these dimensions plays out differently depending on whether the fund is Category I, II, or III, and whether LPs are domestic or cross-border.

Table 1: High-level comparison of AIF legal structures

Dimension	Trust	LLP	Company
Governing statute	Indian Trusts Act, 1882	LLP Act, 2008	Companies Act, 2013
Formation time	2-4 weeks (sub-registrar stamp)	3-6 weeks (MCA ROC filing)	4-8 weeks (MCA + board constitution)
Category I and II pass-through	Yes, under Section 115UB	Yes (Finance Act, 2026 equivalence)	Yes (Section 115UB)
Category III indeterminate trust risk	Applicable	Not applicable	Not applicable
LP liability protection	Contractual via contribution agreement	Statutory under LLP Act	Statutory under Companies Act
Public disclosure of investors	No (no ROC filing for beneficiaries)	Yes (LLP annual return)	Yes (shareholder filings)
Foreign currency accounts (IFSC)	Not applicable	Now permitted for Specified IFSC LLPs	Permitted
Governance bespoke-ability	High (trust deed freedom)	Moderate (LLP agreement)	Low (Companies Act prescriptive)
Dual regulatory reporting	No	Yes (SEBI + MCA)	Yes (SEBI + MCA + NCLT-eligible)
Multi-scheme operations	Clean (sub-trust per scheme, single MCA footprint)	Complex (separate LLP per scheme)	Complex (separate company per scheme)

How does tax pass-through work across all three structures?

For Category I and II AIFs, the tax framework treats income as passing through the fund and being taxed directly in the hands of investors under Section 115UB of the Income Tax Act, 1961. This applies regardless of whether the fund is a trust, LLP, or company. The fund is not the taxable entity for non-business income. Each investor is taxed on their proportionate share as if they had earned the income directly, preserving the income character: long-term capital gains (LTCG) stay LTCG at 12.5% under Section 112A (as revised by Finance Act, 2024), short-term capital gains (STCG) stay STCG at 20% under Section 111A, and interest income is taxed at slab. A full breakdown of how each income type is taxed across fund categories is covered in Treelife’s AIF taxation in India guide.

Business income is the exception. For Category I and II funds, business income is taxed at the fund level at the maximum marginal rate (MMR) of approximately 42.74%. Investors receive this income exempt in their hands. This creates a structural reason to design the fund’s investment activity so it does not get characterised as “business income”, a characterisation the Income Tax department has historically pushed in LLP-structured funds by invoking the term “business” in Sections 2(e) and 11(a) of the LLP Act, 2008.

For Category III AIFs, there is no pass-through at all. The fund pays tax at the fund level on all income (capital gains, business income, dividends, interest) before distribution. Investors receive post-tax distributions, which are exempt in their hands. The effective fund-level tax burden at MMR was a principal driver of the “indeterminate trust” litigation risk unique to trust-structured Category III funds. An LLP or company avoids this specific risk because neither form has the trust-law ambiguity around whether beneficiaries are identifiable.

The Finance Act, 2026 extended pass-through treatment equivalence between trust-AIFs and LLP-AIFs under Sections 10(23FBA) and 115UB. Prior to this, the LLP structure carried residual uncertainty about whether pass-through applied equally. That gap is now closed for Category I and II funds.

Table 2: Tax treatment by structure and AIF category (FY 2026-27)

Income type	Category I / II Trust	Category I / II LLP	Category I / II Company	Category III (any structure)
LTCG (listed equity)	Investor taxed at 12.5% (Section 112A)	Investor taxed at 12.5% (Section 112A)	Investor taxed at 12.5%	Fund taxed at MMR ~42.74%
STCG (listed equity)	Investor taxed at 20% (Section 111A)	Investor taxed at 20%	Investor taxed at 20%	Fund taxed at MMR
Interest income	Investor taxed at slab	Investor taxed at slab	Investor taxed at slab	Fund taxed at MMR
Business income	Fund taxed at MMR	Fund taxed at MMR	Fund taxed at MMR	Fund taxed at MMR
Share buyback proceeds (from 1 April 2026)	Capital gains in investor’s hands	Capital gains in investor’s hands	Capital gains in investor’s hands	Fund-level tax
Withholding tax on distribution (resident)	10% TDS	10% TDS	10% TDS	Exempt (post fund tax)

One change in the Finance Act, 2026 deserves specific attention: share buyback proceeds are now reclassified as capital gains rather than deemed dividends. For funds with portfolio companies that use buyback as an exit mechanism, particularly promoter-driven businesses and family-owned companies pursuing partial liquidity, this reclassification means LTCG pass-through at 12.5% instead of income-character dividend. This benefits LLP-structured Category I and II AIFs particularly because LLP pass-through for capital gains is now unambiguously equivalent to trust pass-through under the updated Section 115UB.

Why has the trust been the default structure for AIFs?

The trust dominated for three practical reasons: formation speed, governance flexibility, and the absence of mandatory public disclosures about beneficiaries.

A trust is formed by executing a trust deed between the settlor (sponsor) and the trustee, stamped and registered before a sub-registrar. No separate regulatory body approves the formation. Unlike a company or LLP, a trust does not require filing charter documents with the Ministry of Corporate Affairs (MCA). Once the trust deed is executed, the SEBI AIF registration application can be filed immediately. For an LLP or company, MCA incorporation, including name approval, ROC filing, designated partner identification, and digital signature certificates, must precede the SEBI registration. This added 3-6 weeks and created a dependency on MCA processing timelines.

On governance, the Indian Trusts Act, 1882 is permissive rather than prescriptive. The trust deed can be drafted to include any commercial arrangement agreed between the manager (acting as the effective general partner) and the investors, including carried interest mechanics, LP advisory committee rights, investment restrictions, co-investment protocols, and removal-for-cause provisions. The Companies Act, 2013 and LLP Act, 2008 impose statutory defaults that cannot always be contracted out.

On LP privacy, trust beneficiaries are not required to be filed with any public registry. In contrast, partners of an LLP appear in annual returns filed with the ROC, and shareholders of a company appear in publicly accessible filings. For domestic HNI investors or family offices who prefer not to have their fund participation publicly searchable, the trust structure has been a clear preference.

The trust structure also handles multi-scheme fund operations more cleanly than the LLP. SEBI requires ring-fencing across schemes managed by the same investment manager to protect investors in one scheme from cross-scheme liabilities (SEBI AIF Regulations, 2012, Regulation 15). Under a trust framework, separate schemes are typically established as sub-trusts or scheme-level arrangements within the master trust, with ring-fenced corpus and separate contribution agreements per scheme. In an LLP structure, each scheme generally requires a distinct LLP entity with its own MCA registration, LLP agreement, and designated partners, multiplying the formation and annual compliance overhead by the number of schemes. For managers planning to run two or more schemes under a single management entity, the trust’s scheme-level flexibility is a meaningful operational advantage over the LLP.

What does the Corporate Laws (Amendment) Bill, 2026 change?

The Corporate Laws (Amendment) Bill, 2026 introduces Section 57A into the LLP Act, 2008, creating for the first time a statutory pathway for SEBI-registered or IFSCA-registered trusts to convert into LLPs. Before this Bill, Section 58 of the LLP Act permitted conversion only from traditional partnership firms or unlisted companies, but trusts were excluded. Fund managers who had originally set up as trusts and later wanted to shift to an LLP structure had no statutory route. They had to wind down and re-incorporate, triggering transfer of assets and a potential taxable event.

The conversion mechanism under the proposed Section 57A operates by statutory vesting: all assets and liabilities of the trust transfer to the newly formed LLP at book value, existing trustees become LLP partners, and the trust is deemed dissolved. No separate transfer deeds or multiple registrations are required. The conversion requires consent from at least 75% of the trust’s investors by value.

Three practical caveats apply, and fund managers should not move before these are resolved. First, the Bill was referred to a Joint Parliamentary Committee (JPC) on 23 March 2026 and has not yet been enacted into law. The conversion pathway becomes operative only after the Bill passes and the Central Government notifies the relevant rules under Section 57A. Second, the Bill does not yet specify which trust “activities” qualify it as a “specified trust” eligible for conversion, these will be defined in rules to be notified. Third, the tax neutrality of the conversion, specifically whether asset transfer from trust to LLP triggers a taxable event under Section 45 of the Income Tax Act, 1961, has not been definitively resolved. The Finance Act, 2026 extended pass-through equivalence but the conversion-specific tax neutrality provision under Section 47 remains under deliberation before the JPC.

For GIFT City specifically, the Bill creates a dedicated “Specified IFSC LLP” category, enabling IFSC-domiciled LLPs to hold and maintain accounts in permitted foreign currency. Previously, LLP capital contributions were required to be made in INR, which created friction when foreign LPs wanted to contribute directly in USD or other currencies. Specified IFSC LLPs are also carved out of certain routine MCA filing requirements, annual filings for every partner change or agreement amendment, provided the entity is SEBI or IFSCA regulated, reducing dual-reporting friction.

When does the LLP structure make sense for an AIF?

The LLP structure is the right choice in four specific scenarios.

First, Category III funds where indeterminate trust litigation risk is a live concern. Trust-based Category III funds face a specific tax argument from the Income Tax department: where the trust deed does not name all beneficiaries at the time of formation (as is standard for open-ended or continuously-marketed funds), the department has argued the trust is an “indeterminate trust” whose income must be taxed at MMR at the trustee level rather than through the standard Category III mechanism. An LLP, as a separate legal entity under the LLP Act, 2008, is not subject to this trust-law ambiguity. All Category III funds still pay tax at the fund level regardless of structure, but the LLP provides a more legally defensible and litigation-resistant basis for the fund’s tax position.

Second, funds targeting foreign institutional LPs from jurisdictions where the limited partnership is the standard vehicle. Global institutional investors, sovereign wealth funds, endowments, pension funds from the US, UK, Europe, and Southeast Asia, are structurally and operationally familiar with limited partnerships. Their legal teams, investment committees, and compliance frameworks are built around LP documents, general partner structures, and drawdown mechanics. The Indian private trust, governed by the Trusts Act, 1882, is an unfamiliar vehicle for these investors. Onboarding an international LP into a trust requires additional legal opinions, trustee approval workflows, and sometimes amended LPs’ side letters. An LLP removes this friction.

Third, funds being set up in GIFT City IFSC where the Specified IFSC LLP framework (post-enactment of the 2026 Bill) offers foreign currency accounting and relaxed MCA filing requirements. For funds raising international capital under the IFSCA regulatory framework, the LLP’s post-2026 architecture is specifically designed to align with global fund management conventions.

Fourth, where the fund manager’s personal liability ring-fencing from the fund is better achieved through the statutory framework of the LLP Act rather than contractual provisions in a trust deed. In a trust, the manager’s liability is ring-fenced only through the terms of the investment management agreement. It is a contractual protection, not a statutory one. In an LLP, the manager (as a designated partner) has statutory protection under Section 28 of the LLP Act, 2008, subject to the standard fraud and misconduct carve-outs.

The practical downside of the LLP remains dual reporting. Any AIF as an LLP must comply with both SEBI and MCA reporting requirements, filing annual returns with the ROC in addition to SEBI quarterly AIF reporting. The Bill proposes relaxations specifically for SEBI and IFSCA-regulated LLPs, but the Government is yet to notify the details and timelines. Until rules are notified, the full dual compliance burden applies.

Is the company structure ever the right choice?

For most fund managers, the answer is no. The company structure for an AIF is governed by the Companies Act, 2013, which imposes a prescriptive governance framework: board constitution requirements, statutory director duties, mandatory ROC filings (including MGT-7, AOC-4), and shareholder-level compliance. The trust deed’s commercial flexibility (bespoke carried interest, LP committee rights, removal provisions) must be replaced with articles of association, which are both more rigid and more publicly visible.

The structural argument against the company is also tax-mechanical. When a company-AIF earns income and distributes it to investors, the income passes through under Section 115UB for non-business income. But investors receive distributions as “dividend” (if declared from distributable profits), which is taxable in their hands at slab under the post-Finance Act 2020 classical system. The effective tax burden on a high-income investor receiving AIF distributions via a company structure (corporate tax plus slab-rate dividend tax) can reach 48.5% on normal income (corporate tax at 25.17% at fund level, then up to 30% slab for the investor). The trust and LLP both avoid this cascading corporate-tax-plus-income-tax structure for non-business income, because the income passes through and retains its character in the investor’s hands.

The company structure makes sense in one narrow context: where an institutional investor, a bank, or a regulated financial entity is required by its internal investment committee or home-country regulatory framework to invest only in a company counterparty, not a trust or LLP. This arises occasionally with certain categories of foreign institutional investors or with insurance company LPs whose investment mandates specify “investee company” rather than “investee fund.” For these edge cases, the company form removes the counterparty objection at the cost of higher governance overhead.

What compliance obligations attach to each structure?

Understanding ongoing compliance costs is as important as the formation decision. The three structures have meaningfully different annual maintenance burdens.

A trust-AIF’s compliance universe covers: SEBI AIF reporting under the revised framework introduced by SEBI Circular No. HO/19/28/(1)2026-AFD-SEC3/I/6176/2026 dated 04 March 2026 (which superseded Clause 15.1 of the SEBI Master Circular for AIFs dated 07 May 2024). Under this revised framework, AIFs no longer file detailed quarterly reports across all four quarters. Instead, they file a comprehensive Annual Activity Report (AAR) within 30 calendar days of March year-end via the SEBI Intermediary Portal (first AAR for FY ending March 2026 was due 31 May 2026), and a limited Quarterly Activity Report (QAR) within 15 calendar days of each quarter-end for the June, September, and December quarters only. No separate QAR is required for the March quarter, as the AAR covers that period. In addition, all AIF units must be held in dematerialised form (Regulation 10(aa), SEBI AIF Regulations, 2012, as amended); all new investments made on or after 01 July 2025 must also be held in dematerialised form. Independent portfolio valuation is now required at least semi-annually (SEBI 2026 Master Circular, June 2026), up from annual for Category I and II funds. PPM update intimation to SEBI and investors every six months for material changes, trustee fee, investment management agreement maintenance, and annual secretarial review of the trust deed also continue. Investor KYC, AML compliance under the Prevention of Money Laundering Act, 2002, and FATCA/CRS reporting for funds with foreign investors apply regardless of structure.

An LLP-AIF carries all of the above SEBI requirements plus MCA annual compliance: filing Form 11 (annual return, due 30 May each year), Form 8 (statement of account and solvency, due 30 October each year), updating designated partner details for any change via Form 4, and filing the LLP agreement for any amendment via Form 3. Designated partners must have valid DINs (Director Identification Numbers). For a trust, there are no equivalent MCA filings. This dual-layer reporting creates an ongoing cost and calendar management overhead that is real, particularly for lean fund management teams in the first two to three years.

A company-AIF adds to the LLP compliance stack: board meeting requirements (minimum four per year), ROC annual filings (MGT-7 for annual return, AOC-4 for financial statements), statutory auditor appointment, and additional board-level governance obligations under the Companies Act, 2013. For a fund focused on investing rather than governing itself, this is unnecessary friction.

One layer that sits alongside the fund vehicle choice is the legal form of the investment manager entity itself. The investment manager can be a private limited company or an LLP, independently of whether the fund is a trust, LLP, or company. In practice, most investment managers are incorporated as private limited companies under the Companies Act, 2013, because SEBI and institutional LPs are both familiar with the governance and disclosure framework that comes with a company. The manager’s legal form affects GST treatment of management fees: management fees charged by the investment manager to the AIF are currently subject to GST at 18%. Where the majority of a fund’s investors are foreign, an industry position under the Alternative Investment Policy Advisory Committee (AIPAC) recommendations has sought either a zero-rating of these fees as export of services, or a refund mechanism. This classification has not yet been resolved by a SEBI or GST Council notification, and fund managers with significant foreign LP bases should obtain a specific legal opinion on the export-of-services treatment before structuring fee flows.

Key compliance dates by structure

• Trust-AIF: SEBI Annual Activity Report (within 30 days of March year-end), SEBI limited Quarterly Activity Report (within 15 days of June, September, December quarter-end)
• LLP-AIF: Above, plus MCA Form 11 (30 May), Form 8 (30 October), partner change Forms as they arise
• Company-AIF: Above, plus MGT-7 (60 days from AGM), AOC-4 (30 days from AGM), four board meetings annually

Structural mistakes that cost fund managers time and money

Picking the trust because it is the default without checking LP requirements. If the fund’s target LP base includes international institutional investors, the trust structure creates onboarding friction at every capital call. Many global LPs require their legal counsel to review and opine on the Indian Trust Act, a step their domestic legal infrastructure is not set up for. Fund managers discover this in due diligence when the first international LP asks for a “limited partnership agreement equivalent” and gets a trust deed that does not map to their legal team’s standard review template. The right fix is to assess the LP mix before formation, not after.

Setting up as a trust-AIF and then trying to convert when the 2026 Bill passes. The conversion pathway under Section 57A is not yet operative. The Bill has been referred to a JPC and enactment timelines are uncertain. Fund managers who assume conversion will be a simple 2026 exercise are taking structural risk. If LLP is the right long-term form, forming as an LLP from inception avoids conversion mechanics entirely. The one caveat: conversion-specific tax neutrality under Section 47 is not yet clarified, meaning the conversion from trust to LLP may trigger a taxable event on asset transfer. This must be verified with a tax advisor once the rules are notified.

Assuming LLP pass-through was not available before the Finance Act, 2026. Category I and II AIFs structured as LLPs had pass-through under Section 115UB even before 2026. The Finance Act, 2026 extended equivalence and closed residual interpretive uncertainty, it did not create pass-through for LLPs from scratch. Fund managers who avoided the LLP on historical tax uncertainty grounds should reassess whether that uncertainty still applies.

Structuring a Category III fund as a trust without considering indeterminate trust risk. The Income Tax department has litigated the “indeterminate trust” characterisation against Category III trust-AIFs where beneficiaries were not specified in the original trust deed. The risk is not theoretical, there are live proceedings. For a Category III fund, the LLP’s structural immunity to this argument is a real advantage, not a theoretical one.

Underestimating the MCA filing overhead for LLP-AIFs. Fund managers who shift to an LLP are often surprised by the MCA calendar. Missing Form 11 or Form 8 deadlines attracts late filing fees under Section 21 of the LLP Act, 2008, and continued non-compliance can result in strike-off. SEBI has no visibility into MCA compliance, and vice versa, so a fund can be fully SEBI-compliant but non-compliant with MCA without either regulator flagging it to the other. Dedicated corporate compliance tracking is essential.

Decision framework: which structure fits your fund?

The right structure depends on four variables: AIF category, LP origin, GIFT City domicile, and sensitivity to LP privacy.

For a Category I or II fund with exclusively domestic LPs (HNIs, family offices, domestic corporates) where LP privacy matters and the fund plans to stay domestic, the trust remains the cleanest choice. Formation is faster, governance is flexible, there is no MCA filing overhead, and beneficiary information stays private.

For a Category I or II fund targeting a mixed LP base with meaningful international allocation, or planning to onboard sovereign wealth funds, endowments, or pension funds in any future close, the LLP is worth forming from inception. The LP familiarity advantage compounds over the fund’s life, reducing legal opinion costs and onboarding friction at every capital call.

For a Category III fund regardless of LP origin, consider the LLP to eliminate indeterminate trust litigation risk and secure a legally defensible tax position.

For a GIFT City (IFSC) fund, the LLP structure post-2026 Bill (once enacted) will be purpose-built for foreign currency operations, reduced MCA filing friction, and global LP onboarding. Formation as a Specified IFSC LLP will be the natural choice for cross-border managers.

For any fund where one or more anchor LPs require a company counterparty, the company structure addresses the specific onboarding requirement, but the fund manager should model the effective tax differential versus a trust before committing.

One additional item for GIFT City fund managers to monitor: the Variable Capital Company (VCC). In the Union Budget 2024 speech, the Finance Minister referenced the introduction of a VCC structure for the IFSC at GIFT City. Policy-level discussions are ongoing. A VCC would function as a corporate vehicle with a flexible capital structure: investors can subscribe and redeem without fixed share capital constraints, which is how most offshore fund vehicles (Cayman Islands exempted companies, Singapore VCCs, Luxembourg SICAVs) operate. If the VCC is introduced for IFSC, it would become a fourth structural option alongside the trust, LLP, and company, and would likely be purpose-built for foreign institutional investors who are accustomed to corporate fund vehicles in offshore jurisdictions. No SEBI or IFSCA regulation has been notified for the VCC as of June 2026. Fund managers setting up GIFT City AIFs today should proceed under the trust or LLP framework without waiting for the VCC, but should build flexibility into fund documents to accommodate a future structural migration if and when the VCC framework is operationalised.

Case study: shifting from trust to LLP-equivalent at GIFT City

Situation: A Mumbai-based fund manager was setting up a Category II debt AIF targeting infrastructure co-investments, with one confirmed European family office LP representing 40% of the planned corpus.

Challenge: The European LP’s legal counsel was unfamiliar with the Indian Trust Act and required a limited partnership agreement equivalent before issuing their investment committee approval. The fund had already begun trust deed drafting.

What Treelife did: Advised a pivot to LLP formation before SEBI registration, drafted the LLP agreement to mirror standard limited partnership commercial terms the LP’s legal team recognised, and mapped the SEBI AIF registration requirements to LLP-specific filings including designated partner DINs and Form 3 LLP agreement.

Outcome: LP investment committee approval was received 18 days faster than initially projected. The fund reached first close at 100% of target corpus with the international LP on board, avoiding a second close that would have delayed deployment by one quarter.

FAQ’s on AIF Trust vs LLP vs Company Structure

Q: Can all three AIF categories, I, II, and III, be structured as any of the three legal forms?
A: Yes. SEBI permits trusts, LLPs, and companies for all three AIF categories. The choice of legal form is independent of AIF category, though the tax treatment differences between Category I/II pass-through and Category III fund-level taxation interact significantly with the legal form choice as explained in this article.

Q: Does a trust-AIF get pass-through tax treatment under the Income Tax Act, 1961?
A: Category I and II trust-AIFs get pass-through treatment under Section 115UB, meaning non-business income is taxed in the hands of investors rather than at the fund level. Business income is taxed at MMR at the fund level. Category III trust-AIFs do not get pass-through, the fund pays tax on all income before distribution.

Q: Has the Finance Act, 2026 made the LLP structurally equivalent to the trust for Category I and II AIFs from a tax perspective?
A: Yes, for non-business income. The Finance Act, 2026 extended pass-through equivalence to LLP-AIFs under Sections 10(23FBA) and 115UB, closing a residual interpretive gap. The risk of business income characterisation under LLP law (Sections 2(e) and 11(a) of the LLP Act, 2008) remains unresolved and requires careful investment mandate design.

Q: What is the “indeterminate trust” risk for Category III AIFs?
A: Where a Category III trust-AIF’s trust deed does not name all beneficiaries at formation, typical for funds marketed on a continuing basis, the Income Tax department has in several cases argued the trust is an “indeterminate trust,” requiring fund-level taxation at MMR even where the standard Category III mechanism would produce a different rate. An LLP or company structure avoids this argument entirely because neither is a “trust” for this purpose.

Q: Can a trust-AIF convert to an LLP today under Indian law?
A: Not through a statutory conversion route yet. The Corporate Laws (Amendment) Bill, 2026 proposes Section 57A of the LLP Act to allow SEBI-registered trust-AIFs to convert to LLPs via statutory vesting. The Bill has been referred to a JPC as of 23 March 2026 and is not yet enacted. Until the Bill is passed and rules are notified, there is no operative statutory conversion pathway.

Q: What are the MCA compliance obligations for an LLP-AIF?
A: An LLP-AIF must file Form 11 (annual return, due 30 May), Form 8 (statement of account and solvency, due 30 October), and Form 3 or Form 4 for any changes to the LLP agreement or partners respectively. These are in addition to all SEBI AIF reporting obligations, creating a dual-compliance calendar.

Q: How does the company structure affect distributions to investors compared to the trust and LLP?
A: A company-AIF distributes income to investors as dividend, which is taxable in investor hands at slab rates under the classical system introduced by Finance Act, 2020. For high-income investors, the effective tax on company-AIF distributions (corporate tax at fund level plus slab on dividend) is significantly higher than the pass-through mechanism available to trust and LLP investors on capital gains and interest income.

Q: What happens to a trust-AIF that has foreign LP investors from an FEMA perspective?
A: Capital contributions by foreign investors into an Indian AIF are treated as FDI under the Foreign Exchange Management Act, 1999 (FEMA) and the FDI Policy, subject to applicable sectoral caps and pricing guidelines. The legal form, trust, LLP, or company, does not change the FEMA treatment. An LLP-AIF receiving foreign investment is subject to FDI pricing norms under the FEMA (Non-Debt Instruments) Rules, 2019.

Q: Does the sponsor commitment requirement differ across trust, LLP, and company structures?
A: No. Regulation 10 of the SEBI AIF Regulations, 2012 requires the sponsor to maintain a continuing interest equivalent to the lower of 2.5% of AUM or ₹5 crore, regardless of legal form. The mechanism for holding this interest differs, units in a trust, LLP partnership interest, or shares in a company, but the quantum obligation is identical.

Q: For a GIFT City AIF, is the trust or LLP preferred?
A: Post-enactment of the Corporate Laws (Amendment) Bill, 2026, the Specified IFSC LLP will likely be the preferred structure for GIFT City AIFs targeting foreign capital. It enables foreign currency capital contributions, has reduced MCA filing requirements for SEBI/IFSCA-regulated entities, and mirrors the limited partnership frameworks familiar to international LPs. Until the Bill is enacted, funds can assess trust versus LLP on current rules, with the LLP already available under IFSCA regulations.

Q: Is the trust structure faster to set up than an LLP or company?
A: Yes. A trust is formed through execution and registration of the trust deed before a sub-registrar, which typically takes 2-4 weeks. An LLP requires MCA incorporation (name approval, Form 2 incorporation document, DIN for designated partners) before SEBI registration can begin, adding 3-6 weeks. A company requires board constitution, MCA incorporation, and shareholder documentation, adding 4-8 weeks.

Q: How is carried interest taxed across the three structures?
A: Budget 2025 clarified that carried interest received by the investment manager from an AIF is treated as capital gains rather than salary or professional income. This applies regardless of whether the AIF is structured as a trust, LLP, or company. From AY 2026-27, carried interest is taxable at 10%, 12.5%, or 20% depending on holding period and asset type, not at the higher professional income rates previously applied.

Q: For an NRI fund manager setting up an AIF, does the legal structure change the regulatory approvals required?
A: The SEBI AIF registration process and sponsor/manager eligibility criteria apply the same way irrespective of whether the manager is resident or non-resident. However, an NRI or foreign national acting as the investment manager of an Indian AIF must maintain compliance with FEMA 1999 on inward and outward remittances including management fees and carried interest. The legal form, trust, LLP, or company, does not alter this FEMA obligation but it does change the mechanism of profit distribution to the manager.

Q: What is the Variable Capital Company (VCC) and should a GIFT City fund manager wait for it?
A: A VCC is a corporate fund vehicle with a flexible capital structure, allowing investor subscriptions and redemptions without fixed share capital constraints, analogous to Cayman Islands exempted companies or Singapore VCCs. The Finance Minister referenced introducing a VCC structure for GIFT City IFSC in the Union Budget 2024 speech, and policy discussions are ongoing. As of June 2026, no SEBI or IFSCA regulation for the VCC has been notified. Fund managers should not delay formation waiting for the VCC framework, set up as a trust or LLP on current rules, and structure fund documents to allow for a future migration if the VCC is introduced.

Q: Does the legal form of the investment manager entity affect GST on management fees?
A: The investment manager entity is separate from the AIF fund vehicle and is typically incorporated as a private limited company. Management fees charged by the manager to the AIF attract GST at 18% on the fee amount. Where the majority of the fund’s investors are foreign, there is an unresolved industry position that these fees should qualify as export of services and be zero-rated or refunded. This treatment has been recommended by AIPAC but has not been confirmed by SEBI or the GST Council. Fund managers with significant foreign LP bases should obtain a specific legal opinion before structuring fee flows on an export-of-services basis.

Regulatory references

• SEBI (Alternative Investment Funds) Regulations, 2012, Regulation 2(1)(b) (AIF definition), Regulation 10 (sponsor commitment), Regulation 10(aa) (dematerialisation of units), Regulation 14 (registration categories), Regulation 15 (ring-fencing of schemes), Regulation 28 (reporting obligations)
• SEBI Circular No. HO/19/28/(1)2026-AFD-SEC3/I/6176/2026 dated 04 March 2026, revised AIF reporting framework; Annual Activity Report due within 30 days of March year-end; limited Quarterly Activity Report due within 15 days of June, September, December quarter-end; supersedes Clause 15.1 of SEBI AIF Master Circular dated 07 May 2024
• SEBI Master Circular for AIFs dated June 2026, consolidates all circulars up to May 2026; semi-annual independent valuation mandate; co-investment limited to accredited investors; overseas investment cap at USD 1.5 billion; NISM certification requirement for key investment team
• SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2025, notified 08 September 2025, angel fund reforms; co-investment scheme (CIV) framework for accredited investors
• SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025, notified 18 November 2025, AI-only fund framework; LVF minimum investment threshold reduced from ₹70 crore to ₹25 crore per accredited investor
• SEBI Circular dated 14 February 2025, dematerialisation of AIF investments; all new investments on or after 01 July 2025 must be held in dematerialised form
• Income Tax Act, 1961, Section 115UB (pass-through for Category I and II AIFs), Sections 10(23FBA) and 10(23FBC) (IFSC AIF exemptions), Section 111A (STCG on listed equity at 20%), Section 112A (LTCG on listed equity at 12.5%), Section 45 (capital gains on transfer)
• Finance Act, 2015, introduced special taxation regime and pass-through for Category I and II AIFs
• Finance Act, 2024, revised LTCG to 12.5% and STCG to 20% on listed equity (effective 23 July 2024)
• Finance Act, 2026, extended pass-through equivalence to LLP-AIFs under Sections 10(23FBA) and 115UB; reclassified share buyback proceeds as capital gains
• Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026), proposed Section 57A of LLP Act, 2008 (trust-to-LLP conversion); Specified IFSC LLP framework; foreign currency account provisions for IFSC LLPs
• LLP Act, 2008, Sections 2(e), 11(a) (business characterisation), Section 21 (annual return filing), Section 28 (partner liability)
• Companies Act, 2013, Section 233 (fast-track merger), MGT-7, AOC-4 annual filing obligations
• Indian Trusts Act, 1882, trust formation and governance
• Foreign Exchange Management Act, 1999, FDI treatment of foreign LP contributions to Indian AIFs
• FEMA (Non-Debt Instruments) Rules, 2019, pricing norms for foreign investment in LLP-AIFs
• Prevention of Money Laundering Act, 2002, KYC and AML obligations applicable to all AIF structures
• GST Act, 2017, 18% GST on management fees charged by investment manager to AIF; unresolved export-of-services classification for foreign-LP-majority funds (AIPAC recommendation pending GST Council notification)

External sources

• Securities and Exchange Board of India
• Ministry of Corporate Affairs
• Income Tax India
• PRS Legislative Research, Corporate Laws (Amendment) Bill, 2026
• IFSCA, International Financial Services Centres Authority
• Reserve Bank of India