Delhi High Court's Decision Potentially Grants Substantial Tax Relief to Category III Alternative Investment Funds
In a landmark decision on July 29, 2025, the Delhi High Court ruled that Category III Alternative Investment Funds (AIFs), which include hedge funds and funds engaged in private investments in public equities (PIPE), cannot be treated as "indeterminate trusts" for tax purposes.
The court's ruling quashed a June 2021 order of the Board, which mandated listing investor names in the original trust deed for such funds to be treated as "determinate trusts." The court held that the Central Board of Direct Taxes (CBDT) Circular No. 13/2014, which enforced this requirement, is inconsistent with Securities and Exchange Board of India (SEBI) regulations and thus unlawful.
This ruling aligns with views from other courts and addresses longstanding uncertainty in the tax treatment of Category III AIFs, which have significant market scale and attract sophisticated capital, including offshore investors. The decision emphasizes a substance-over-form approach, recognizing the operational realities of pooled investment vehicles, where investor allocations, though not explicitly named in trust deeds, are documented and determinable.
As a result, Category III AIFs are no longer subject to taxation at the maximum marginal rate as was being applied on the basis of the circular. The exact nature of the relief for these funds is not specified, but the ruling potentially offers major tax relief to such funds, including hedge funds and PIPE investments.
Whether the CBDT will formally withdraw the 2014 circular or challenge the judgment on appeal remains to be seen. However, this ruling marks a crucial shift toward legal clarity and parity for Category III AIFs in India.
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The implications of this judgement for the broader financial market are not discussed in the article. It is unclear how this ruling will affect the overall tax landscape for alternative investment funds in India.
[1] Legal Update: Delhi High Court Quashes CBDT Circular on Taxation of Category III AIFs [2] Delhi High Court: Category III AIFs Not Indeterminate Trusts for Tax Purposes [3] Delhi High Court Ruling Brings Major Tax Relief to Category III AIFs [4] Delhi High Court: Category III AIFs Not Subject to Highest Marginal Tax Rate [5] Delhi High Court: Substance-Over-Form Approach for Category III AIF Taxation
- This Delhi High Court ruling indicates that significant changes in finance are on the horizon for Category III Alternative Investment Funds (AIFs), particularly those functioning as hedge funds and private investments in public equities (PIPEs), as they will no longer be subject to the highest marginal tax rate.
- The court's decision to quash the 2014 CBDT Circular and reiterate that Category III AIFs are not indeterminate trusts for tax purposes could potentially bring about major investing opportunities in the business sector, as these funds may now benefit from reduced tax burdens.
