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AIF Industry Seeks Tax Equity for Private Credit in 2026 Budget

  //business-finance.news-articles.net/content/202 .. ax-equity-for-private-credit-in-2026-budget.html
  Published in Business and Finance on Wednesday, January 7th 2026 at 8:43 GMT by Business Today

Budget 2026 Wishlist: AIF Industry Calls for Tax Equity in Private Credit & Streamlined Regulations

The Indian Alternative Investment Fund (AIF) industry is gearing up for the 2026 budget, and a key ask is leveling the playing field for private credit, specifically within Category III AIFs. Currently, a perceived tax disadvantage compared to other debt instruments is hindering growth in this vital segment of the financial market. This article, and further research into the sector, reveals a growing industry seeking clarification and simplification of regulations to unlock further potential and contribute significantly to India's economic growth.

The Core Issue: Tax Disparity & Its Impact

The primary concern voiced by the AIF industry revolves around the tax treatment of returns generated from private credit investments held within Category III AIFs. Category III AIFs, which employ more complex or leveraged strategies, including private credit, are taxed as normal income for investors. This means returns are subject to the highest applicable income tax slab.

However, similar debt instruments, like bank loans and corporate bonds, enjoy concessional tax rates, particularly for long-term capital gains. This disparity creates an uneven playing field, making private credit investments held through AIFs less attractive to investors despite potentially offering higher returns. Industry experts argue this discourages capital allocation towards productive sectors of the economy that benefit from private credit financing, like infrastructure, manufacturing, and MSMEs.

Understanding Private Credit & its Growing Importance

Private credit, also known as direct lending, involves lending to companies directly, bypassing traditional banks and capital markets. This has become increasingly important, particularly for companies that may not have easy access to conventional funding sources, or desire funding with more flexible terms. The demand for private credit has surged in recent years, fuelled by several factors:

• Tightening Bank Lending: Banks are often constrained by regulations and risk aversion, limiting their lending capacity, particularly to smaller and mid-sized enterprises.
• Demand for Flexible Financing: Companies often require customized financing solutions that banks are unable to provide. Private credit can offer more flexible terms, repayment schedules, and collateral requirements.
• Growth of Alternative Investments: Investors are increasingly diversifying their portfolios beyond traditional asset classes, seeking higher returns in alternatives like private credit.

According to industry estimates cited in the Business Today article, the AIF industry has witnessed substantial growth, with assets under management (AUM) reaching approximately ₹8.12 lakh crore (roughly $97.5 billion USD as of early January 2026). Private credit represents a significant, and rapidly expanding, portion of this AUM.

Specific Budget Requests & Proposed Solutions

The AIF industry isn't simply asking for a handout; they're proposing pragmatic solutions to address the tax disparity. Key requests for Budget 2026 include:

• Treating Private Credit on Par with Other Debt Instruments: The core demand is to align the tax treatment of returns from private credit within Category III AIFs with that of other debt instruments, potentially through the introduction of a concessional tax rate on long-term capital gains.
• Clarification on 'Business Profits' vs. 'Capital Gains': A significant point of contention lies in the categorization of income from private credit. The industry argues that income derived from these investments should be classified as capital gains, rather than business profits, which are subject to higher tax rates. This requires clear regulatory guidance.
• Rationalization of the Minimum Holding Period: Current regulations require a minimum holding period of 36 months for investments to qualify as long-term capital gains. The industry suggests this period should be reduced to align with other debt investments, potentially to 12 months.
• Streamlining KYC & Reporting Requirements: The AIF industry also seeks simplification of Know Your Customer (KYC) and reporting requirements, which are currently considered cumbersome and add to compliance costs. A standardized, digital framework would greatly improve efficiency.
• Relaxation of Investment Restrictions: Certain restrictions on the types of companies AIFs can invest in are seen as limiting the potential for growth. Relaxing these restrictions, while maintaining appropriate safeguards, could unlock further capital deployment.

Beyond Taxation: Regulatory Concerns & Industry Maturity

While taxation is the dominant issue, the industry also highlights the need for broader regulatory clarity. The AIF framework, established by SEBI (Securities and Exchange Board of India) in 2012, has matured over time. However, stakeholders believe further refinements are necessary to facilitate innovation and attract more investors.

The Business Today article points to a growing consensus that SEBI is receptive to the industry's concerns and is actively engaging in dialogue to address them. A collaborative approach between the regulator and industry participants is crucial to ensure that the AIF sector continues to thrive.

The Bigger Picture: Impact on Economic Growth

Addressing the concerns of the AIF industry, particularly regarding private credit, is not just about benefitting fund managers and investors. It has broader implications for the Indian economy. By creating a more favorable environment for private credit, the government can:

• Boost Funding for MSMEs: Private credit can provide much-needed capital to small and medium-sized enterprises, fostering entrepreneurship and job creation.
• Drive Infrastructure Development: Private credit can play a crucial role in financing infrastructure projects, which are essential for economic growth.
• Enhance Financial Inclusion: Private credit can reach underserved segments of the population that may not have access to traditional banking services.
• Attract Foreign Investment: A thriving AIF sector can attract foreign investment, contributing to India's balance of payments and overall economic stability.

In conclusion, the Indian AIF industry is poised for significant growth, but realizing its full potential hinges on addressing the tax disparity impacting private credit and streamlining regulatory processes. The 2026 budget presents a critical opportunity for the government to demonstrate its commitment to fostering a vibrant and inclusive financial ecosystem. A favorable response to the industry's wishlist will undoubtedly unlock a new wave of investment and contribute significantly to India’s economic aspirations.