NRI Taxation on Category I and II AIFs

Category I and II AIFs enjoy pass-through tax status in India — income retains its character (business income or capital gains) as it flows to investors, and the same treatment applies to NRI investors, who owe Indian tax on this Indian-source income regardless of residency status.

Beyond Indian tax, an NRI investor's home country may separately tax the same income as part of worldwide income, and whether a Double Taxation Avoidance Agreement (DTAA) between India and that country provides credit for Indian tax already paid depends entirely on the specific treaty's terms.

The common failure is planning around Indian tax alone without confirming home-country treatment and DTAA applicability. Without proper DTAA credit claims, the same income can effectively be taxed twice, meaningfully reducing net returns versus what headline Indian tax rates alone would suggest.

Before committing, confirm with advisers in both jurisdictions: the specific Indian tax treatment (TDS rates, filing obligations); the home-country tax treatment of the same income; and whether and how DTAA provisions can be claimed to avoid double taxation on the same income stream.

Plan tax treatment in both India and the country of residence together — Indian tax alone doesn't tell the full story of what an NRI investor actually nets.