India’s AIF Structural Crossroads: How the Corporate Laws (Amendment) Bill, 2026 and Finance Act, 2026 Redraw the Trust vs. LLP Calculus

Overview

The tabling of the Corporate Laws (Amendment) Bill, 2026 in the Lok Sabha on March 23, 2026 marked a structural inflection point for India’s Alternative Investment Fund (AIF) industry. The Bill proposes a statutory route for trusts registered with SEBI or the IFSC Authority to convert into LLPs (proposed Section 57A and a new Fifth Schedule to the LLP Act, 2008). The Joint Parliamentary Committee (JPC) presented its report on August 3, 2026, endorsing the Bill with modifications, including several that are relevant to AIFs.

In parallel, the Finance Act, 2026 (assented March 30, 2026) moved the taxation of share buyback proceeds from dividend to capital gains for buybacks on or after April 1, 2026, the same date from which the Income-tax Act, 2025 applies.

For fund managers, family offices and institutional limited partners, the Trust is no longer the default, self-evidently superior choice. It is not obsolete either. The Bill is still pending before Parliament, the conversion route has no matching income-tax exemption, and former trustees remain liable for pre-conversion obligations. This analysis sets out the position as of October 12, 2026.

What Has Changed Since March 2026

• JPC report presented: The JPC presented its report on the Corporate Laws (Amendment) Bill, 2026 on August 3, 2026, after 25 sittings. It recommended adoption of the Bill with clause-wise modifications. Two of its 31 members submitted dissent notes.
• Bill still pending: The Bill was not passed in the Monsoon Session (July 20 to August 13, 2026) and remains pending. Once passed, it comes into force only on dates notified by the Central Government, and different dates may be appointed for different provisions.
• AIF-relevant JPC recommendations: an enabling framework for multi-scheme trusts to convert (the Bill as introduced contemplates single-scheme trusts); investor consent for conversion to be measured as three-fourths in value rather than by head count; annual filing of LLP agreement changes for prescribed SEBI- or IFSCA-regulated LLPs; exemption of such LLPs’ documents from public inspection; and specific consideration of Category I and II AIFs for inclusion in the prescribed class when the rules are framed.
• Tax neutrality still unresolved: Section 47 of the Income-tax Act contains no exemption for conversion of a trust into an LLP. The Finance Act, 2026 did not add one, and the Taxation and Other Laws (Amendment) Bill, 2026, passed by Parliament on August 10, 2026, does not address it.
• New tax statute: The Income-tax Act, 2025 applies from April 1, 2026. References to Income-tax Act, 1961 provisions in this article should be read with their corresponding provisions in the 2025 Act.
• SEBI developments: a revised AIF reporting framework (March 4, 2026); board approvals on March 23, 2026; a consolidated Master Circular for AIFs (June 3, 2026); and the GARUDA mechanism for faster scheme launches (AIF Regulations amended July 14, 2026; circular dated July 30, 2026).
• Market scale: AIF commitments reached ₹17.53 lakh crore as of June 30, 2026 (SEBI data, as reported).

Context and Legislative Background

The SEBI (Alternative Investment Funds) Regulations, 2012 permit an AIF to be set up as a trust, a company, an LLP or a body corporate. In practice, the overwhelming majority of SEBI-registered AIFs are trusts. Two practical obstacles held the LLP back: the LLP Act requires partner changes to be reported to the Registrar within 30 days, which is difficult for funds with frequent investor entry and exit, and there was no legal route to convert an existing trust fund into an LLP.

Four developments in 2026 have altered this landscape:

• The Finance Act, 2026, which taxes buyback proceeds as capital gains for buybacks on or after April 1, 2026;
• SEBI’s revised AIF reporting framework (circular dated March 4, 2026, effective immediately), which applies to all AIFs;
• The Corporate Laws (Amendment) Bill, 2026, which proposes a statutory framework for converting SEBI- or IFSCA-registered trusts into LLPs, with automatic vesting of assets and liabilities; and
• The JPC report of August 3, 2026, which endorses the Bill and recommends further relief for regulated LLPs.

The legislative intent to make the LLP a viable AIF vehicle is clear. However, the conversion route is not yet law, and its income-tax treatment is unresolved.

Key Legislative Developments

1. Pass-Through Taxation: Category I and II AIFs

Pass-through treatment for Category I and II AIFs does not depend on legal form. Section 115UB defines ‘investment fund’ as a fund established or incorporated in India as a trust, a company, an LLP or a body corporate that is registered as a Category I or Category II AIF. In substance:

• Income other than business income is taxed in the hands of unit holders as if they had made the investments directly, and retains its character. A long-term capital gain realised by the fund is a long-term capital gain for the investor. For listed equity under Section 112A, the rate is 12.5% with an annual exemption of ₹1.25 lakh (applicable to transfers on or after July 23, 2024).
• Business income is taxed at the fund level. Under Section 115UB(4), a fund that is a company or a firm (an LLP is taxed as a firm) pays tax at the rates in the relevant Finance Act; any other fund, including a trust, pays tax at the maximum marginal rate (MMR). The MMR is 39% under the default regime and 42.744% where the old regime applies.
• Under the Income-tax Act, 2025, TDS on income from an investment fund (formerly Section 194LBB) falls under Section 393. The rate is 10% for residents; non-residents are subject to the rates in force.

For Category I and II AIFs, tax treatment of pass-through income is the same whether the fund is a Trust or an LLP. The barriers to the LLP have been compliance, privacy and the absence of a conversion route, and the 2026 Bill addresses these.

2. Buyback Proceeds Taxed as Capital Gains

Under the regime applicable to buybacks on or after October 1, 2024, the entire buyback consideration was taxed as dividend in the shareholder’s hands, with the cost of the shares available only as a capital loss.

For buybacks on or after April 1, 2026, the Finance Act, 2026 taxes the consideration as capital gains, so only the gain over the cost of acquisition is taxed. For non-promoter shareholders, long-term gains are taxed at 12.5%, short-term gains on listed shares at 20%, and short-term gains on unlisted shares at slab rates. The Finance Act, 2026 also applies a flat 12% surcharge on capital gains from buybacks, for individual and corporate shareholders.

Promoters pay additional tax, giving an effective rate of 22% for a promoter that is a domestic company and 30% for other promoters. For a listed company, ‘promoter’ follows the SEBI definition; for an unlisted company, it includes a person holding, directly or indirectly, more than 10% of the shareholding. AIFs with significant stakes in unlisted companies should check whether they fall within this definition.

The change is relevant for AIFs whose portfolio companies may use buybacks as an exit route.

3. The Conversion Framework: Statutory Vesting, Tax Neutrality Pending

The Bill inserts proposed Section 57A and a Fifth Schedule into the LLP Act, 2008, allowing a ‘specified trust’ to convert into an LLP. A specified trust is one established under the Indian Trusts Act, 1882 or another Central or State Act, registered with SEBI or the IFSC Authority, and carrying on prescribed activities. Under the Bill as introduced:

• All assets, liabilities, rights and obligations of the trust vest automatically in the LLP, the trust is deemed dissolved, and its contracts continue as if entered into by the LLP;
• Conversion is permitted only where the partners of the new LLP are the trustees of the trust ‘and no one else’. Investors do not automatically become partners, and separate documentation is needed to admit them;
• Every former trustee remains personally liable, jointly and severally with the LLP, for liabilities incurred before conversion (Paragraph 16 of the Fifth Schedule); and
• Conversion requires the consent of three-fourths of the investors of the trust. The JPC has recommended that this be measured as three-fourths in value.

The JPC has also recommended an enabling framework for multi-scheme trusts, which the Bill as introduced does not cover.

The critical gap is tax. Section 47 of the Income-tax Act lists transactions not treated as transfers, and it includes, for example, the conversion of a private or unlisted public company into an LLP (Section 47(xiiib)), subject to conditions. There is no equivalent provision for conversion of a trust into an LLP, and none was added by the Finance Act, 2026 or the Taxation and Other Laws (Amendment) Bill, 2026. Without it, conversion may give rise to capital gains. Fund managers should obtain formal tax advice, and consider an advance ruling, before initiating conversion.

4. Category III AIFs: LLP as a Structurally Safer Option

Category III AIFs do not get pass-through treatment and are taxed at the fund level whatever their structure. Trust-based Category III funds have faced the argument that they are ‘indeterminate trusts’, which would attract tax at the MMR.

That risk has narrowed. In Equity Intelligence AIF Trust v. CBDT (Delhi High Court, 2025), the court held that a Category III AIF trust is determinate even if investor names are not in the trust deed, as long as the investors and their shares are identifiable from the contribution agreements. Investment income of a determinate trust is taxed at the rate applicable to the investor, although business income may still attract the MMR.

An LLP is a separate legal entity under the LLP Act, 2008, and is not exposed to the indeterminate-trust question at all. It remains taxable at the fund level.

Table 1: Legal and Operational Attributes

Table 2: Tax Treatment Comparison

Concurrent SEBI Reforms

On March 23, 2026, SEBI’s board approved High-Level Committee recommendations on conflicts of interest, including stricter disclosure norms for officials, investment restrictions extending to immediate family, recusal frameworks and an ethics oversight structure.

Of direct relevance to AIF managers:

• Retention of liquidation proceeds beyond the fund’s permissible life is allowed where a litigation notice or tax or regulatory demand has been received, where at least 75% of investors by value consent, or for substantiated operational expenses, capped at three years from the end of the fund’s life;
• AIFs intending to surrender registration may be classified as ‘inoperative funds’ with lighter compliance;
• The minimum individual investment in Social Impact Funds under the Social Stock Exchange is reduced from ₹2 lakh to ₹1,000;
• InvITs and REITs may invest surplus funds in liquid mutual fund schemes with a credit risk value of at least 10 (Class A-I or B-I), and privately listed InvITs may invest up to 10% of asset value in greenfield infrastructure projects;
• A consolidated Master Circular for AIFs was issued on June 3, 2026, rescinding 31 earlier circulars and superseding the Master Circular of May 7, 2024; and
• Under the GARUDA (‘Green-Channel: AIF Rollout Upon Document Acknowledgement’) mechanism, following amendments to the AIF Regulations notified on July 14, 2026, a regular scheme may generally launch 10 working days after filing its placement memorandum, with due diligence by a merchant banker who is not an associate of the AIF. Accredited-investor-only funds, large value funds and angel funds follow a differentiated route.

Under the March 4, 2026 reporting circular, AIFs file an annual activity report through the SEBI Intermediary Portal (the first, for the year ending March 2026, was due by May 31, 2026) and a revised quarterly report from the quarter ending June 2026, within 15 calendar days of quarter-end. These requirements apply to all AIFs, whatever their legal form.

Industry and Market Implications

As of June 30, 2026, AIF commitments stood at ₹17.53 lakh crore (SEBI data, as reported).

• Foreign capital: In our view, the LLP’s separate legal personality and statutory liability protection may make it easier to onboard foreign institutional LPs who are more familiar with partnership-based fund vehicles.
• GIFT City: The Bill creates a ‘Specified IFSC LLP’ category. Such LLPs would account for and disclose partner contributions in permitted foreign currency. The JPC has recommended allowing the shorter suffix ‘IFSC LLP’ in the name.
• Family offices: India had more than 300 family offices as of 2024, up from 45 in 2018, according to PwC. The JPC’s recommended exemption from public inspection for regulated LLPs addresses a privacy concern relevant to family office investors.
• Promoter-led restructuring: For promoter groups, the buyback change mainly benefits non-promoter shareholders. Where an AIF qualifies as a promoter, the effective rate remains 22% or 30%.

Structural Decision Framework

An LLP may suit a fund where:

• it targets foreign institutional capital;
• it is a Category III AIF and wants to avoid the indeterminate-trust question altogether; or
• it plans to operate from GIFT City, once the Specified IFSC LLP provisions are enacted.

A Trust may still suit a fund where:

• privacy is paramount, at least until the public-inspection exemption for regulated LLPs is enacted;
• investor entry and exit is frequent, until annual reporting for regulated LLPs is in force;
• it runs or plans multiple schemes, since a trust handles multiple schemes more simply than separate LLPs; or
• it is small and domestic, where LLP filings add compliance cost.

QVSCL Advisory View

The Corporate Laws (Amendment) Bill, 2026, as endorsed by the JPC, addresses most of the non-tax obstacles that kept the LLP a secondary choice for Indian AIFs. Pass-through parity for Category I and II funds was already in place.

For new funds targeting foreign capital, planning GIFT City operations, or structured as Category III vehicles, the LLP is a strong option, provided the manager can handle current 30-day filing and public-inspection requirements until the Bill is enacted.

For existing Trust-based AIFs, the conversion route is not yet law and has no income-tax exemption. We advise starting structural reviews now, but not converting until (i) the Bill is passed and notified, (ii) the rules defining eligible trusts and the prescribed class are issued, and (iii) the tax position is legislated or covered by formal tax advice or an advance ruling. Trustees should also factor in their continuing liability for pre-conversion obligations.

• Mondaq: SEBI Master Circular for AIFs (June 3, 2026); King Stubb & Kasiva: GARUDA mechanism (July 30, 2026).
• Angel One and Lapaas Voice: AIF commitments as of June 30, 2026 (SEBI data).

Business Standard: Family offices rise to 300 since 2018 (PwC) (July 3, 2024).