Navigating carried interest in India

No.

Carried interest is not governed by a specific statutory regime under the Income-tax Act, 2025. The characterization and taxation depend on the fund structure (overseas or domestic) and on whether, in the hands of the fund managers or sponsors, carried interest is treated as a return on investment or as a performance fee. Typically, carried interest linked to “carry units” is taxed as capital gains either as short-term capital gains (STCG) at applicable rates if the units are held for up to 24 months or long-term capital gains (LTCG) at 12.5% (plus surcharge and 4% cess) if held beyond 24 months.  For goods and services tax (GST) purposes, income from carry units is generally regarded as a return on securities and therefore not subject to GST. However, where the carry is characterized as a performance fee, it may be taxed as business income at applicable rates (up to 30% plus surcharge and 4% cess) and be subject to GST.  A 2021 decision by the Bangalore Tribunal held that carried interest constituted consideration for asset management services and should be treated as a performance fee liable to service tax (the GST predecessor), but this was overturned by the Karnataka High Court and, subsequently, by the Supreme Court.

Because there is no specific carried interest regime in India, the default position is that carry is taxed under the capital gains where it reflects returns on carry units. The actual characterization—and therefore the tax treatment—will be driven by the fund’s structuring (offshore or onshore) and by the contractual arrangements with the general partner and related parties (including investment managers and sponsors of Alternative Investment Funds (AIFs)). 

In the absence of a dedicated regime, the tax analysis applies to all taxpayers/beneficiaries that hold carry units. Beneficiaries are identified based on the fund structure and the relevant contractual documents. In practice, the beneficiaries are typically fund managers, sponsors, or investment professionals entitled to a share of the fund’s profits, with entitlement linked to fund performance and distributed under the fund terms.  In some structures, the entitlement is held through pooling vehicles (e.g., LLPs or companies) established for the management team, so the ultimate beneficiaries are the individuals behind those vehicles.

Carried interest commonly arises in offshore funds, AIFs registered with the Securities and Exchange Board of India (SEBI)—notably Category I and Category II AIFs (including private equity and venture capital funds)—where managers or sponsors participate in upside profits.  In addition, certain real estate investment funds, infrastructure investment funds, and hedge funds may also provide for carried interest depending on the fund’s terms, with availability and structure driven primarily by fund documentation rather than legislation.

No, unless structured as employment income. Carry is usually earned by fund managers or sponsors as investors (capital gains) or as a performance service fee/business income rather than as employment income, so social security contributions do not apply.  If, however, carry is structured and characterized as part of employment compensation (e.g., a discretionary bonus), it is taxable as employment income; in practice, given the scope and thresholds of Indian social security rules for Indian employees, the social security impact is typically not material. 

No.