Category 2 AIF Taxation: Form 64C, TDS and ITR Filing, Line by Line

The principle behind Category 2 AIF taxation fits in one sentence: the fund is looked through, and you are taxed as if you owned its investments yourself. Most investors know that much before they sign the contribution agreement.

The difficulty starts a year later. A statement arrives in June with five or six lines of income, a TDS figure that does not match the tax you owe, and a gain you have not yet received in cash. None of this is about the principle. It is about paperwork: who reports what, on which form, by which date.

This guide is written for investors in Category II AIFs (private equity, private credit, real estate and fund-of-funds structures) and for the CAs who file their returns. It covers the mechanics, from the pass-through rule to the return schedules, and ends with a worked example of one year's statement.

One thing makes 2026 unusual. The Income-tax Act, 2025 replaced the 1961 Act on 1 April 2026, and the Income-tax Rules, 2026 replaced the 1962 Rules on the same day. The law on Category II AIFs did not change in substance, but every section number and form number did. Both sets appear below.

This is general information, not tax advice. Rates, surcharge and treaty positions depend on your own facts, so confirm the numbers with a qualified tax adviser before you file.

SEBI created the three AIF categories in 2012. Category II is the residual one: funds that are neither Category I nor Category III and that do not borrow except for day-to-day operations. SEBI's own examples are private equity funds, real estate funds and funds for distressed assets.

The tax law took three more years to catch up. Until 2015, pass-through treatment existed only for venture capital funds. The Finance Act 2015 changed this by adding section 115UB to the 1961 Act, with two matching exemptions and a new TDS provision, section 194LBB. Category I and II AIFs got a statutory pass-through. Category III funds did not, and still do not.

The first version passed income through but trapped losses inside the fund. The Finance (No. 2) Act 2019 changed that: non-business losses now pass to investors, subject to a holding condition explained later.

A second problem took longer. If a fund's share sales were treated as a business rather than as investments, the gains became business income, taxable at the fund's rate instead of the investor's. The Finance Act 2025 settled the point by treating securities held by Category I and II AIFs as capital assets, with effect from assessment year 2026-27. Gains on those securities are capital gains.

The 2025 Act kept all of this and renumbered it. Fund documents, older statements and most online articles still use the 1961 numbers, so keep this table handy.

Section 224 of the Income-tax Act, 2025 applies to an "investment fund", defined as a fund registered as a Category I or Category II AIF under SEBI's regulations or under the IFSCA fund-management regulations. It divides the fund's income into two streams.

Everything except business income is exempt for the fund under Schedule V. That covers interest, dividends and capital gains. The same income is then taxed in your hands. Section 224(1) says it is chargeable "in the same manner as if" the fund's investments had been made directly by you.

Section 224(5) adds the character rule. Income paid or credited by the fund is deemed to be of the same nature and in the same proportion in your hands as it was in the fund's. Interest stays interest. A long-term capital gain stays a long-term capital gain. Whether a gain is long-term or short-term depends on how long the fund held the asset, not on how long you have held your units.

This is what pass-through taxation means in practice: one layer of tax, at your rates, on your share.

Business income works the other way. The fund pays tax on it, at the rates in the Finance Act if the fund is a company or a firm and at the maximum marginal rate in any other case, which includes the trust structure most AIFs use. Your share of that income is then exempt in your hands under Schedule V. It still appears on your statement and has to be reported as exempt income. For most Category II funds this stream is small.

This is the rule investors most often miss. You are taxed when the fund earns the income, not when it pays you.

Section 224(7) says that income accruing to the fund during a tax year, if not paid or credited to you, is deemed to have been credited to your account on the last day of the tax year, in the proportion you would have been entitled to. Section 224(8) gives the other half: income taxed in your hands on accrual is not taxed again in the year the cash arrives.

Take a private equity fund that sells a portfolio company in February 2027 and distributes the proceeds in May 2027. Your share of the gain belongs to tax year 2026-27 and appears on that year's statement. When the money reaches you in May, nothing further is taxable.

Three practical consequences follow.

• Tax can come before cash. A fund that reinvests or holds back proceeds can leave you with a tax bill and no distribution to pay it from.
• Advance tax needs an estimate. The income belongs to the year in which it arose, but the statement arrives after that year ends. Ask the fund for an income estimate before the March advance-tax instalment, because interest may apply to a shortfall.
• A distribution is not always income. Read the distribution notice, which should separate return of capital from income.

Because character passes through, two Category II funds with the same pre-tax return can leave very different amounts after tax. The mix of income decides the outcome.

A private credit fund earns mostly interest on loans and debentures. Interest passes to you as income from other sources and is taxed at your slab rate, with surcharge and cess on top. So are dividends.

Gains on the fund's unlisted debentures get no relief either. Under section 76 of the 2025 Act (old section 50AA), a gain on an unlisted bond or debenture that is transferred, redeemed or matures on or after 23 July 2024 is treated as a short-term capital gain whatever the holding period, and short-term gains of this kind are taxed at slab rates.

The industry has said as much. In its pre-Budget representations for 2026, reported by Business Today in January 2026, the industry body IVCA noted that private credit AIFs are taxed as ordinary income, often at the highest marginal rate of around 39%.

A private equity fund earns mostly capital gains on shares. Unlisted shares become long-term after 24 months. Long-term gains are taxed at 12.5% under section 197 (old section 112), without indexation. Shares sold within 24 months produce short-term gains taxed at slab rates. If the fund exits through a listing, the listed-equity rates apply instead.

There is a second advantage for large investors. Under the rate schedule in the Finance Bill 2026, the surcharge on tax attributable to dividends and to capital gains taxed under the special-rate sections cannot exceed 15%. Interest gets no such cap.

TDS on AIF income sat in section 194LBB of the 1961 Act. From 1 April 2026 it sits in the tables of section 393. The rule for residents has four parts.

• Rate: 10%.
• Threshold: nil. Tax is deducted from the first rupee.
• Base: any income on the units other than the business-income share that is exempt in your hands. Capital gains are included.
• Timing: when the income is credited to your account or paid, whichever is earlier. Funds generally treat the year-end deemed credit as a credit for this purpose, so tax is deducted on undistributed income as well.

Two side rules matter. If the fund does not hold your PAN, section 397 requires deduction at the higher of the prescribed rate and 20%. And if 10% would over-deduct, you can ask the Assessing Officer for a lower or nil deduction certificate, a facility that has covered these payments since 1 June 2016.

The most important point is what TDS is not. It is not the tax on the income. Ten per cent is an advance payment, credited against your final liability. On interest taxed at a 30% slab rate you still owe roughly two-thirds of the tax after TDS.

After deducting, the fund deposits the tax, files a quarterly TDS statement and issues you a TDS certificate. Under the old rules that certificate was Form 16A; Business Today's summary of the renumbered forms lists it as Form 131.

For non-residents the fund deducts tax at the "rates in force", meaning the rate the Finance Act or a tax treaty sets for that type of income, not a flat 10%. No tax is deducted on income that is not chargeable to tax in India, and a 2019 CBDT circular treats a non-resident's share of income from an AIF's offshore investments that way. Treaty relief needs a tax residency certificate. NRI rates and treaty claims deserve a guide of their own.

Section 224(9) requires the fund, and the person responsible for crediting or paying income on its behalf, to furnish a statement to two parties: the investor and the tax department. The rules give each statement a form number.

Form 64C is the investor's copy under Rule 12CB of the 1962 Rules. It is due by 30 June after the financial year. Form 64D is the fund's consolidated statement to the tax department, due by 15 June and verified by an accountant.

Under Rule 145 of the Income-tax Rules, 2026, Form 78 replaces Form 64C and Form 79 replaces Form 64D, with the same 30 June and 15 June dates. The fund files Form 79 electronically, and Form 78 is generated from the tax department's portal on the basis of that filing. A caveat: we could not open the notified rule text or the department's own notes on these forms while writing this, so the details here rest on the draft rule and on published summaries that agree with each other.

From those summaries, Form 78 has two parts. Part A identifies you and the fund by name, PAN and address. Part B gives the income paid or credited to you, split by head:

• business or profession (the share taxed at the fund)
• long-term capital gains, with a code for the applicable rate
• short-term capital gains, again coded by rate
• dividend
• other sources, such as interest
• your share of any loss, and any loss deemed yours as at 31 March 2019

The rate codes are new, and are meant to let each capital-gain line drop into the right row of the return.

The tax department has confirmed that years before 1 April 2026 stay under the 1961 Act. TDS is different. Tax deducted on income credited or paid from 1 April 2026 is already deducted under section 393, so this year's TDS certificates may carry the new numbering even though your last annual statement was a Form 64C.

Pass-through income has its own schedule in the return. Schedule PTI was added to the return forms for assessment year 2016-17, the first filing season after the regime began. It appears in ITR-2, ITR-3, ITR-5, ITR-6 and ITR-7. ITR-1 and ITR-4 do not have it, so an individual with AIF income files ITR-2, or ITR-3 if they also have business income.

In Schedule PTI of the return you enter the fund's name and PAN and the section under which it is covered, then the income head by head. For each head there are four figures: current-year income, your share of any current-year loss, the net figure, and TDS on that amount. The heads mirror the statement: house property, short-term capital gains, long-term capital gains, other sources (dividend and other income) and exempt income.

Schedule PTI is a disclosure schedule. The income also has to be carried to the schedule where tax is computed.

Report gross income, not the amount received after TDS. The TDS is claimed separately as a credit. The description above follows the forms used for assessment year 2026-27; check the layout of the forms notified for tax year 2026-27 when you file next year.

Before filing, lay three documents side by side: the fund's statement, your TDS certificates and your Form 26AS (Form 168 under the 2026 Rules), with the Annual Information Statement as a cross-check.

• TDS should agree across all three. The e-filing portal says the tax credit you claim is restricted to the amount reflected in Form 26AS. If the fund deducted tax but your Form 26AS shows less, the fund has to correct its TDS statement. You cannot fix it from your side.
• Quarter-end timing differs. TDS on a 31 March deemed credit appears in the last quarter's TDS statement, which the fund files after the year ends. Check again in June if the entry is missing in May.

The numbers below are illustrative. Meera, a resident individual in the 30% slab, has committed Rs 2 crore to a Category II fund that holds unlisted debentures and unlisted shares. Surcharge is ignored to keep the arithmetic visible. Her Form 64C for financial year 2025-26 shows the following.

Line 5 is exempt in her hands. It goes into Schedule PTI as exempt income and on to Schedule EI. Taxable pass-through income is Rs 23,00,000.

The gain in line 4 was not received until May 2026. It still belongs to 2025-26 because it was deemed credited on 31 March 2026. The May receipt is not taxed again in 2026-27.

Tax of Rs 4,99,200 less TDS of Rs 2,30,000 leaves Rs 2,69,200 to pay through advance tax or self-assessment tax. The effective rate on Rs 23 lakh of taxable income is about 21.7%, well above the 10% deducted.

The split explains the result. The Rs 12 lakh of long-term gain bore Rs 1,50,000 of tax. The Rs 11 lakh of interest, dividend and debenture gain bore Rs 3,30,000. A pure private credit fund paying Meera the same Rs 23 lakh as interest would have cost Rs 6,90,000 before cess.

Had the same income arisen in tax year 2026-27, only the labels would change: Form 78 instead of Form 64C, and sections 224 and 393 instead of 115UB and 194LBB.

Read as a system, the pass-through regime does several things well.

• One layer of tax. Non-business income is exempt for the fund and taxed once, in your hands.
• Your rates, your set-offs. A long-term gain from the fund sits alongside your other capital gains and losses, under the normal set-off rules.
• A fixed document on a fixed date. The 30 June statement gives every investor in the fund the same head-wise breakdown, tied to the fund's own filing with the department.
• Digital by design. Form 79 is filed electronically and Form 78 is generated from the portal, so the investor's copy and the department's copy come from one dataset.
• Certainty on character. The 2025 capital-asset amendment removed the long-running question of whether a fund's share sales were business income.

For a CA, this turns an opaque trust investment into a predictable routine: one statement, one schedule and one reconciliation.

Everything above happens after you invest. The decisions that shape your June statement are made before: which fund, which strategy, and what kind of income it will send you. That is where PMS Sahi Hai is useful, and it is worth being exact about what it does and does not do.

What you can do on the platform today

• Shortlist by category. The AIF compare page lists the AIFs the platform tracks, with a filter for Category I, II and III and columns for strategy, vintage, AUM, one-year return, lock-in and Nyra score. Since Category I and II funds are pass-through and Category III funds are taxed at the fund level, the category filter is also the first tax filter.
• Ask in plain English. Nyra, the platform's AI research assistant, takes a goal described in ordinary language and ranks matching funds. Its own page describes it as "an analytical tool, not a SEBI-registered Investment Adviser".
• Read the rules first. The guide to AIF Categories I, II and III sets out what each category may hold, whether it can borrow and how it is taxed. The PMS and AIF taxes explainer shows who pays the tax in each structure, and our earlier post, Category II AIF Explained, covers what a Category II fund is and who it suits.

What it does not do

The compare table has no tax, TDS or post-tax return column. The site has no Form 64C or Form 78 walkthrough and no calculator for Schedule PTI. Nyra's published methodology scores strategies on five pillars of performance, risk and structure, and states its own limit plainly: a high score is "not a recommendation", because a strategy "can be completely wrong for your risk profile, horizon or tax position".

How to combine the two

Use the platform to build a shortlist of two or three Category II funds. Then put this guide's questions to each manager: what share of income is expected as interest and what share as long-term gains, when distributions are planned, and what year-end tax support investors receive. The score tells you how a strategy has performed. The answers tell you what your statement, and your tax bill, will look like.

The same system has real costs, and it is better to know them before you commit.

Losses pass through only partly. Under section 224(2), which carries forward the loss rules introduced in 2019, a business loss stays with the fund, which carries it forward itself. Any other loss, typically a capital loss, passes to you only if you have held the units for at least twelve months. If you have not, that loss is ignored for pass-through. Late-closing investors in a fund that books an early write-off can lose the benefit.

Tax without cash, and a 10% gap. The deemed-credit rule can produce a liability in a year with no distribution, and TDS covers only part of the tax on interest-heavy income.

Late information. A statement due on 30 June arrives after the last advance-tax date of the year it describes. The tax rules set no date for interim estimates, so you depend on the fund's goodwill for them.

Dependence on the fund's filings. If the fund's TDS statement carries a wrong PAN or amount, your credit is stuck until the fund revises it.

Expenses are not standardised. How management fees and fund expenses are allocated across income heads in the statement is not something the sources we reviewed prescribe, and practice differs between funds. Ask the fund whether the figures are net of expenses and how they were apportioned.

A transition year. Documents for 2025-26 and 2026-27 carry different numbers for the same rule, which invites clerical errors.

Category II AIF taxation rewards investors who treat it as a calendar. A routine that works:

1. Before 15 March: ask the fund for an estimate of income for the year, including undistributed gains, and pay advance tax on it.
2. In May and June: download Form 26AS and the Annual Information Statement and check that TDS for all four quarters is showing.
3. By 30 June: collect the statement (Form 64C for 2025-26, Form 78 from 2026-27) and the TDS certificates.
4. Before filing: split the statement by head, fill Schedule PTI, carry each line to Schedule CG, OS or EI, and claim TDS against the fund's TAN.
5. Check losses: claim a pass-through loss only if your units were held for twelve months or more.
6. Keep the file: store distribution notices so that a later cash receipt of income already taxed is not taxed twice.

The routine starts earlier than the first statement, though. The income mix is fixed by the fund you pick, which is why it helps to compare Category II funds on PMS Sahi Hai, with Nyra's scores alongside, before the paperwork begins.

Two funds with the same headline return can produce very different statements in June. One sends mostly interest taxed at your slab rate with a 10% TDS credit. The other sends long-term gains taxed at 12.5%, sometimes a year before the cash. Neither is better in the abstract. What matters is which one fits your cash flow and your other gains and losses.

Start with a shortlist. Use the AIF compare page to filter Category II funds, or ask Nyra to rank funds against your goal. Then ask each manager three things: the expected income mix, the distribution policy, and how the fund supports investors with year-end estimates and statements.

If you would like a second pair of eyes on the shortlist, book a private consultation with the PMS Sahi Hai team. Take the answers, and this guide, to your CA before you sign.