1. INTRODUCTION
Carried interest is a performance-based incentive for investment managers in Alternative Investment Funds (AIFs), contingent upon surpassing a predetermined hurdle rate. In India, there’s a lack of specific tax regulations for carried interest, prompting the government to explore international tax frameworks. This document summarizes tax implications for carried interest in India.
2. CARRIED INTEREST STRUCTURE
Carried interest, typically around 20%, is allocated to managers after investors receive their capital and hurdle returns.
3. TAXATION OF CARRIED INTEREST
Tax treatment varies based on characterization as capital gains or business income, influencing tax rates and GST applicability. Legal rulings have clarified some ambiguities, but specific GST guidance remains uncertain.
4. CONCLUSION
Taxation of carried interest is complex and requires careful consideration. Establishing clear provisions would enhance certainty for the AIF sector, benefiting the economy. Further insights on fund setup in GIFT City will follow.