AIF Taxation for NRIs: Rates by Category and Repatriation

A resident investor in an alternative investment fund asks one question: does the fund pass income through or pay its own tax? A non-resident Indian has to ask three.

• The category layer. Category I and II funds pass income through to you. A Category III AIF is taxed inside the fund.
• The non-resident layer. Your rates, the tax deducted before payment and the reliefs available all differ from a resident's.
• The FEMA layer. Exchange-control rules decide which bank account your payout lands in and how much can leave India each year.

Most guides to NRI AIF tax take these one at a time. This guide covers all three for onshore, SEBI-registered funds, with section numbers under the Income-tax Act, 2025 and old numbers in brackets.

The sums involved are large. SEBI's AIF data as at 30 June 2026 shows AIFs had raised ₹27,323 crore from NRIs: ₹13,736 crore in Category III, ₹11,451 crore in Category II and ₹2,136 crore in Category I.

The present rules were built in stages.

• 2012. SEBI's AIF Regulations created three categories and let a fund raise money "from any investor whether Indian, foreign or non-resident Indians", with a ₹1 crore minimum.
• 2015 and 2016. Category I and II funds got pass-through status under section 115UB. From 1 June 2016, tax deducted on payouts to non-residents moved from a flat 10% to "rates in force".
• 13 November 2016. The Reserve Bank opened units of "investment vehicles", which include AIFs, to persons resident outside India.
• 17 October 2019. The Non-Debt Instruments Rules replaced the older FEMA regulations. Schedule VIII covers foreign investment in investment vehicles; Schedule IV covers NRI investment on a non-repatriation basis.
• 23 July 2024. Capital gains rates were reset to 12.5% long-term and 20% for short-term listed equity and indexation was withdrawn, as the memorandum to the Finance Bill, 2024 sets out.
• 1 April 2026. The Income-tax Act, 2025 came into force. Section 115UB became section 224, the non-resident deduction rule moved to section 393(2), and Forms 10F, 15CA and 15CB were renumbered.

SEBI lets an AIF take money from NRIs, and the Reserve Bank's Master Direction on Foreign Investment in India lets a person resident outside India hold AIF units, other than citizens of Pakistan and Bangladesh. The fund's minimum, usually ₹1 crore, applies to you as it does to a resident. What matters here is that the entry route fixes your exit.

Any person resident outside India may invest in units of an investment vehicle under Schedule VIII. The Reserve Bank's mode of payment regulations (FEMA 395) require the money to come as an inward remittance or out of "any repatriable foreign currency or Rupee account". In practice that is a wire from abroad, an NRE account or an FCNR(B) deposit.

On exit, the sale or maturity proceeds, net of taxes, "may be remitted outside India" or credited to a repatriable account.

This counts as foreign investment in the fund. One side effect: a Category III AIF "which has foreign investment" may make portfolio investments only in securities that foreign portfolio investors may buy. Some managers therefore take NRI money only on the other route.

Schedule IV is open only to NRIs and Overseas Citizens of India. You may buy units of an investment vehicle "without any limit", and the investment is treated as domestic investment on par with a resident's. You can pay from abroad or from an NRE, FCNR(B) or NRO account.

The cost comes at exit. The proceeds "shall be credited only to the NRO account of the investor, irrespective of the type of account from which the consideration was paid". NRE money invested under this schedule loses its repatriable character.

Tax is the same on both routes. Your contribution agreement should state the route; if it does not, ask the fund in writing.

Section 224 of the Income-tax Act, 2025 (old section 115UB) says income from a Category I or Category II AIF is taxed "in the same manner as if it were the income accruing or arising to, or received by, such person, had the investments made by the investment fund been made directly by him". Income keeps its nature: a long-term gain in the fund is a long-term gain in your hands.

The exception is business income. If the fund has any, the fund pays tax on it at the maximum marginal rate and it is exempt for you.

For a non-resident individual in tax year 2026-27, before surcharge and cess:

Slab rates are those of the default regime in section 202: nil up to ₹4 lakh, rising in steps to 30% above ₹24 lakh. A private credit Category II AIF paying mostly interest and a growth equity fund paying mostly long-term gains give the same NRI very different tax bills.

Three reliefs do not reach you here.

• Indexation was withdrawn for everyone on 23 July 2024.
• The foreign-currency method. A non-resident can normally compute gains on shares of an Indian company in the currency used to buy them, which removes rupee depreciation. Section 197(4) switches that off for long-term gains on unlisted securities, so you pay 12.5% on the rupee gain.
• The basic exemption and the rebate. The law lets only residents set unused basic exemption against these gains, and the rebate under section 156 (old 87A) is for residents too. A non-resident pays 12.5% from the first rupee.

If the fund earns income in a tax year and does not pay it out, section 224 deems it credited to you on the last day of that year. You are taxed on it then, and not again when the cash arrives.

A non-resident is taxed in India only on Indian-source income. The tax board's Circular 14 of 2019, recited in Circular 12 of 2023, applied that to funds: your share of a Category I or II fund's income from its investments outside India is not taxable in India.

For a resident, the fund deducts a flat 10%. For a non-resident, section 393(2) of the 2025 Act (old section 194LBB) sets the deduction at "rates in force". There is no threshold, and no deduction on income that is not chargeable to tax in India.

Part II of the First Schedule to the Finance Bill, 2026, enacted as the Finance Act, 2026, lists the rates for each kind of income paid to a non-resident Indian:

• long-term capital gains: 12.5%
• short-term gains on listed equity under section 196: 20%
• dividends: 20%
• everything else, including rupee interest and short-term gains on unlisted assets: 30%

Surcharge is added where payments cross ₹50 lakh in the year, and a 4% cess applies on top. So TDS on AIF income is not one number. On a ₹10 lakh distribution it is ₹1,30,000 if the whole amount is long-term gain and ₹3,12,000 if it is all interest.

The 30% line causes most trouble. Your actual tax on interest is at slab rates, which start at nil, so the fund often deducts more than you owe, and the excess comes back only as a refund.

The 2025 Act defines "rates in force" for this entry as the Finance Act rate or the rate in a tax treaty, "whichever is applicable". The fund may therefore deduct at the treaty rate once it has your documents.

Treaties mainly help on dividends and interest. A UAE resident's treaty ceiling, per PwC's table of India's treaty withholding rates, is 10% on dividends and 12.5% on most interest. A US resident's ceiling on portfolio dividends is 25%, above India's 20%, so the domestic rate applies. On gains from shares of Indian companies, the treaties with the US, UK and UAE leave India's right to tax in place.

One caution: the claim rests on reading pass-through income as your own income from the underlying company. Section 224 is worded that way, but have an adviser confirm your case.

• A tax residency certificate from your country for the relevant year.
• Form 41, the online declaration that replaced Form 10F on 1 April 2026.
• Your PAN. Without it, the law requires deduction at the higher of the normal rate or 20%.
• In practice, a declaration that you have no permanent establishment in India.

File these before the first distribution of each year. If your true liability is well below the deduction, the Act also allows an application for a lower or nil deduction certificate.

Surcharge for a non-resident individual follows the resident bands: 10% of the tax where total income exceeds ₹50 lakh, 15% above ₹1 crore and 25% above ₹2 crore under the default regime. On dividends and on capital gains under sections 196, 197 and 198, surcharge is capped at 15%. A 4% cess applies to tax plus surcharge.

Effective rates at the top tier:

• long-term gains: 12.5% × 1.15 × 1.04 = 14.95%
• dividends: 20% × 1.15 × 1.04 = 23.92%
• interest and other slab income: 30% × 1.25 × 1.04 = 39%

TDS is a payment on account, not the final tax. Expect to file an Indian return whenever your share of the fund's income is taxable. The return is where slab rates are applied to interest and refunds are claimed.

A Category III AIF has no pass-through. Most are trusts, and the trustee pays tax on the fund's income as a representative of the investors.

A fund treated as a determinate trust pays by type of income. At the top surcharge tier in 2026-27 that is about 14.95% on long-term listed equity gains, 23.92% on short-term ones, 35.88% on dividends and 39% on interest. Business income, which usually includes futures and options profit, is taxed at the maximum marginal rate of 39% to 42.744%. The often-quoted flat 42.74% is the ceiling, not the rate on every rupee.

Four points matter to a non-resident.

• No TDS under the AIF rule. The "rates in force" deduction applies only to section 224 funds. A Category III AIF settles its own tax, and what you receive is net.
• Your own status is hard to use. The law taxes the trustee "in like manner and to the same extent" as the investor it represents, which in principle points to a separate calculation for each investor. Business income goes to the maximum marginal rate whoever the investor is. Ask whether the fund computes tax investor by investor.
• Distribution and redemption are not expressly exempt. The common position is that income taxed in the trustee's hands is not taxed again in yours. No clause says so in terms, and the treatment of a gain on redeeming units is debated.
• Credit at home is uncertain. The trustee paid the Indian tax. Whether your country gives you credit for it depends on its own rules.

On exchange control, the Reserve Bank's regulations do not make Category III money harder to repatriate. The route decides that.

Rates are for a non-resident individual in tax year 2026-27, before surcharge and cess unless stated. "Repatriable" assumes tax has been paid.

AIF repatriation follows the route you entered on.

If you invested on a repatriation basis, the fund can pay distributions and exit proceeds, net of tax, to your overseas account or your NRE account, whose balances are freely repatriable. The yearly ceiling below is a rule for NRO balances and does not sit in this path.

If you invested on a non-repatriation basis, every payout goes to your NRO account. From there:

• Under the Reserve Bank's Master Direction on Remittance of Assets, an NRI may remit up to USD 1 million per financial year, April to March, out of NRO balances and sale proceeds of assets. A transfer from NRO to NRE counts toward the same limit, which covers all your NRO money together.
• Anything above it needs the Reserve Bank's prior approval.
• The bank takes an undertaking that the money is from your "legitimate receivables in India" and not borrowed.
• Current income such as dividends and interest is, per the Reserve Bank's FAQ on non-resident accounts, repatriable from an NRO account outside the ceiling. Whether a particular fund distribution is current income or a capital receipt is for your bank to decide with the fund's statement in hand.

A payment to a non-resident is reported to the tax department before the bank releases it. Since 1 April 2026 the declaration is Form 145 (old Form 15CA) and the chartered accountant's certificate is Form 146 (old Form 15CB). The e-filing portal's guidance on the certificate, which still carries the old form number, says it is needed where taxable payments to the non-resident exceed ₹5 lakh in the year.

When the fund pays a non-resident, the fund is the payer and handles the reporting. When you move money from your own NRO account to an account abroad, your bank will ask you for the forms and proof that tax has been paid.

The figures are assumed for illustration.

Anita lives in Dubai and is tax resident in the UAE. She committed ₹2 crore to a Category II AIF from her NRE account on a repatriation basis. In tax year 2026-27 the fund's statement shows her share of income, all distributed:

• long-term gains on unlisted shares: ₹30,00,000
• interest on debentures: ₹8,00,000
• dividends: ₹2,00,000

She has no other Indian income. Her total of ₹40,00,000 is below the ₹50 lakh surcharge threshold.

Step 1: tax deducted with no treaty documents on file.

Step 2: her actual tax under the Act. Long-term gains at 12.5% come to ₹3,75,000 and dividends at 20% to ₹40,000. Interest of ₹8,00,000 is taxed at slab rates: nil on the first ₹4 lakh and 5% on the next ₹4 lakh, or ₹20,000. With 4% cess the total is ₹4,52,400. She is owed a refund of ₹2,28,800, which arrives only after she files a return.

Step 3: the same year with a UAE residency certificate and Form 41 filed first. The fund deducts 12.5% plus cess on the gains (₹3,90,000), the treaty's 10% on dividends (₹20,000) and the treaty's 12.5% on interest (₹1,00,000). TDS falls to ₹5,10,000.

In her return she uses, for each stream of income, whichever of the Act or the treaty is kinder. That is the generally accepted reading, and her adviser should confirm it. On interest the Act's ₹20,800 beats the treaty's ₹1,00,000. On dividends the treaty's ₹20,000 beats the Act's ₹41,600. Final tax is ₹3,90,000 + ₹20,000 + ₹20,800 = ₹4,30,800, and the refund is ₹79,200.

Step 4: repatriation. The fund credits ₹34,90,000 to her NRE account, and she can send it to Dubai with no ceiling.

Change one fact. Had Anita invested from her NRO account on a non-repatriation basis, the tax would be identical, but the ₹34,90,000 would go to her NRO account. Sending it abroad would need Form 145, a Form 146 certificate and room within that year's USD 1 million limit.

Little of this is done on paper now.

• The fund's annual statement. Each year the fund issues a statement of the income paid or credited to you, by type. It was Form 64C under the 1961 Act and is reported to be Form 78 under the 2026 rules. It is the base document for your Indian return.
• The e-filing portal. Form 41, Form 145 and Form 146 are filed online, and your tax credit statement shows what the fund has deposited against your PAN.
• The bank. Authorised dealer banks check the forms and the source of NRO funds before a wire goes out.

• Income keeps its character. A long-term gain in a Category I or Category II AIF is taxed at 12.5% in your hands, not at slab rates.
• The treaty rate can apply at the deduction stage, because the statute writes it into "rates in force" for this income.
• Dividends are taxed at a flat 20%, and a treaty can lower that.
• Surcharge on gains and dividends stops at 15%.
• Offshore income is outside the Indian net for a non-resident investor.
• The repatriation route is clean. Proceeds, net of tax, can go abroad or to an NRE account without an annual ceiling.
• The non-repatriation route is flexible. It has no investment limit and accepts NRO money such as rent or sale proceeds.

Everything above turns on two facts about a fund: its category and what kind of income it earns. That is where a comparison platform is useful, and where its limits should be stated plainly.

What PMS Sahi Hai shows. The AIF comparison page lists 269 AIFs with category, strategy, vintage, AUM, one-year return, lock-in and a Nyra score, and a filter for Category I, II or III. Sorting funds by category is the first step in the tax question, because it tells you whether the tax falls on you or inside the fund. The site's guide to AIF categories makes the same point and adds a practical rule: Category III returns arrive already taxed, so compare them net, not gross.

What Nyra does. Nyra is the platform's AI research tool for PMS, AIF and GIFT City funds. You describe your goal in plain English and it ranks matching funds, or suggests which AIF category fits your capital and horizon, with source-cited answers. The site describes Nyra as an analytical tool, not a SEBI-registered investment adviser, and its output as informational, not personalised advice.

What the NRI pages add. The NRI hub offers a 15-minute consultation and links to explainers on treaty relief by country of residence and on GIFT City. Two published guides sit close to this one: whether an AIF is tax free under the pass-through rule and how AIFs work in India.

What it does not do. The site has no calculator for an NRI's AIF tax and no repatriation tool. Its fund tables do not show a fund's FEMA route, its tax deduction practice for non-residents or its NRI eligibility. Those answers come from the fund's contribution agreement and tax note, read against the rules in this guide.

A sensible order of work: shortlist by category and strategy on the platform, then put the four route and tax questions at the end of this guide to each manager, and take the replies to your tax adviser.

• Over-deduction on interest. A 30% deduction against a slab-rate liability locks up cash until the refund.
• Fewer reliefs than a resident. No basic exemption against special-rate gains, no rebate, and no currency adjustment on long-term unlisted share gains.
• Tax before cash. Deemed credit at year end can create tax on income not yet received.
• The NRO trap. Money invested on a non-repatriation basis comes back only to NRO, even if it started in an NRE account.
• Category III opacity. Fund-level rates may not reflect your status, and distribution, redemption and home-country credit are not settled by any express provision.
• Home-country rules. A US person holding a pooled foreign fund faces the passive foreign investment company rules.

Three mistakes recur: assuming the fund category decides repatriation, when the route does; filing treaty documents after the first distribution; and treating TDS as the final tax and never claiming the refund.

An NRI who wants Indian assets without the rupee leg can look at funds in the International Financial Services Centre at GIFT City. They are regulated by IFSCA, deal in foreign currency and are treated as non-resident for exchange control, so the NRO ceiling and the remittance forms do not stand between you and your payout.

The tax design differs too. In an IFSC Category III fund that qualifies as a "specified fund", the fund pays Indian tax on its Indian share gains and dividends, and the non-resident unit holder is exempt on what it receives. Each point has conditions. The exit side is covered in the PMS Sahi Hai guide to repatriation from GIFT City funds.

AIF tax for NRIs is manageable once the three layers are separated.

The category tells you who pays: you in a Category I or II fund, the fund in a Category III AIF. Your non-resident status sets the deduction: rates in force, or treaty rates if your residency certificate and Form 41 reach the fund in time. The FEMA route sets the exit: an NRE account or abroad on a repatriation basis, an NRO account with a USD 1 million yearly limit otherwise.

Get the route in writing, model the income mix, and have a cross-border tax adviser check the Indian and home-country ends together. PMS Sahi Hai and Nyra can help with the step before that, which is narrowing the list of funds by category and strategy.

Before you sign a contribution agreement, get four things in writing from the fund: the FEMA schedule your units will be issued under, the kinds of income it expects to earn, how it deducts tax for non-residents, and what its tax note says about distributions and exit.

To build the shortlist first, filter funds by category on the PMS Sahi Hai AIF comparison page or ask Nyra to rank them against your goal.

Put three documents on file before the first payout: your PAN, a current tax residency certificate and Form 41. Then take the whole picture to a tax adviser who works across both countries, because the Indian rate is only half the answer if your country of residence taxes the same income.

This article is for general information as on 13 October 2026 and is not tax, legal or investment advice. Outcomes depend on your residential status, your country of residence, the fund's documents and your bank's requirements. Investments in securities markets are subject to market risks.