The Union Budget has designated income from Category I and II alternative investment funds (AIFs) as capital gains, taxed at 12.5%, effective from April 1, 2026. This amendment expands the definition of a capital asset under the Income Tax Act, previously lacking specific provisions for AIF income. If classified as business income, the tax rate would rise to 30% for residents and up to 39% for non-residents. Industry leaders welcomed this clarity, emphasizing its potential to enhance equity for AIFs with foreign investors and streamline tax processes, ultimately fostering a more favorable investment environment.