India’s direct tax law changed on April 1, 2026. The Income Tax Act, 2025 replaced the six-decade-old Income Tax Act, 1961. For most investors, the impact is structural rather than financial: tax rates and slabs are unchanged.
For AIF investors, however, the change carries specific compliance implications. Section numbering has shifted, new forms are live, filing deadlines have moved, and the pass-through treatment for Category I and II AIFs is now codified more clearly than before.
Key Takeaways
- New Law, Effective April 1, 2026: The Income Tax Act, 2025 replaced the 1961 Act from April 1, 2026. It has 536 sections across 23 chapters – down from 819 – with simpler language and no change to underlying tax rates.
- The “Tax Year” Is Now Official: The confusing dual-calendar system of “Previous Year” and “Assessment Year” has been replaced by a single “Tax Year.” Tax Year 2026-27 covers income from April 1, 2026, to March 31, 2027.
- Category I and II AIF Pass-Through Clarified: Securities held by Category I and II AIFs are now expressly defined as capital assets. Gains from their transfer are capital gains – not business income – in the hands of investors, removing a long-standing ambiguity.
- Extended ITR Deadline: Per the CBDT press release dated April 1, 2026, ITR-3 and ITR-4 filing deadlines for non-audit taxpayers are extended to August 31 from the end of the Tax Year. Individual returns (ITR-1, ITR-2) remain due July 31.
- AIF Industry Context: India’s AIF sector held ₹15.74 lakh crore in total commitments as of December 2025 per SEBI data – a base of sophisticated investors directly affected by this compliance shift.
- SEBI Risk Reminder: All AIF investments are subject to market risk and illiquidity risk. Past performance does not guarantee future results. Investors must seek qualified independent tax and investment advice before making decisions.
What Has Changed Under the New Act
The Income Tax Act, 2025 is a structural overhaul, not a rate revision. It reduces total sections from 819 to 536, uses tables and formulas in place of verbose text, and introduces the Income Tax Rules, 2026, notified by CBDT on March 20, 2026.
The most visible change is the “Tax Year” concept. Income from April 1, 2026, is earned and assessed within Tax Year 2026-27 – one unified label, replacing the old “financial year” and “assessment year” distinction. Income earned in FY 2025-26 is still governed by the old Act, with returns due July 31, 2026.
Category I and II AIF Investors: What the New Act Clarifies
Category I and II AIFs carry pass-through status. Income – capital gains, interest, and dividends – is exempt at the fund level and taxed directly in investors’ hands, retaining its original character. The Income Tax Act, 2025 preserves this structure intact.
A key clarification effective from Tax Year 2026-27: securities held by Category I and II AIFs are now expressly recognized as capital assets. Gains from their transfer are capital gains – not business income – removing the scope for tax authorities to reclassify them.
Category III AIF Investors: Key Points to Know
Category III AIFs are taxed at the fund level and do not carry pass-through status. Income is taxed within the fund at the maximum marginal rate. Investors receive distributions without further capital gains liability in their own hands, and do not need to report pass-through income in their ITR.
For Category III investors, the fundamental tax treatment is unchanged. Section numbers have shifted, and fund documentation referencing old Act provisions will be updated by managers over time. Any distributions received should be reviewed with a tax advisor.
Six-Point Compliance Checklist for AIF Investors
- Identify AIF Category First: Determine whether the investment is in Category I, II, or III. The entire compliance path – forms, income reporting, and applicable tax rates – flows from this distinction.
- Collect Form 64C (Category I and II Only): Fund managers issue Form 64C to investors, showing the investor’s share of income and its character. This is the primary document needed to populate AIF-related schedules in the ITR.
- Choose the Correct ITR Form: Category I and II AIF income is reported in ITR-2 (capital gains, no business income) or ITR-3 (with business income). Category III investors report only distributions received, if applicable.
- Check Advance Tax Obligations: If total tax liability across all income (including AIF pass-through) is expected to exceed ₹10,000 in Tax Year 2026-27, advance tax must be paid quarterly. Shortfall attracts interest.
- Verify TDS Credit: Category I and II AIFs withhold 10% tax at source on income distributed to resident investors. Ensure this is reflected in Form 26AS and claim the credit in the ITR to avoid double payment.
- Note the Extended Filing Deadline: ITR-3 and ITR-4 deadlines for Tax Year 2026-27 are extended to August 31, 2027. ITR-1 and ITR-2 remain due July 31, 2027.
What Investors Should Consider
The Income Tax Act, 2025, is a once-in-a-generation reform. While underlying tax liability is largely unchanged, new section numbering, updated rules, and revised forms create a transition window where errors are easy to make. At the SEBI-mandated minimum of ₹1 crore per scheme, errors in income classification or TDS claims carry real cost.
All investments in AIFs are subject to market risk, liquidity risk, and regulatory risk. The tax framework continues to evolve. Investors should work with a qualified Chartered Accountant familiar with the Income Tax Act, 2025, and AIF-specific provisions before filing returns for Tax Year 2026-27.
Conclusion
The Income Tax Act, 2025 is live. For AIF investors, the transition requires attention – not panic. The fundamental tax treatment across all three AIF categories is preserved. Compliance of language, section numbers, filing deadlines, and forms have changed. The underlying tax policy has not.
Steptrade Capital’s team remains focused on SEBI-regulated AIF structures that are research-driven and compliance-aware. To learn more about how Steptrade approaches AIF investing, visit Steptrade Capital
