Equity-oriented Investment Fund
A Category III AIF that invests over 65% (or 90% via another fund) of its proceeds in listed domestic equity shares — taxed at 20% short-term and 12.5% long-term capital gains rates, per SEBI's AIPAC.
In plain language
A mutual-fund scheme normally counts as an "equity-oriented fund" if at least 65% of its assets sit in domestic equity shares. That label brings lower capital gains tax rates.
But Category III AIFs had a gap. The Income Tax Act's definition of a "Capital Asset" does not even include them. So it was unclear how gains on transferring Category III AIF units should be taxed at all. SEBI's AIPAC proposed a fix. It extended the equity-oriented fund idea to Category III AIFs directly. This created a new label just for them: the Equity-oriented Investment Fund.
How it works
A Category III AIF is treated as an Equity-oriented Investment Fund if, tested by the annual average of monthly average opening and closing NAV:
- it invests more than 65% of its total proceeds directly in equity shares of domestic companies listed on a recognised Indian stock exchange; or
- where it invests in units of another fund traded on a recognised exchange, at least 90% of its own proceeds go into that other fund, and that investee fund in turn invests at least 90% of its proceeds in listed domestic equity shares.
Why the classification matters. If the Category III AIF is an Equity-oriented Investment Fund, gains on transfer of its units are taxed at the same concessional rates as listed equity: 20% short-term capital gains, and 12.5% long-term capital gains (on gains above Rs 1.25 lakh in a year, where STT is paid). If it is instead a non-equity-oriented investment fund, gains are taxed at the investor's individual slab rates instead.
This is separate from the "Investment Fund" defined under Section 115UB — that section covers Category I and II AIFs and grants them tax pass-through on non-business income. Category III AIFs are excluded from that Section 115UB definition entirely; the Equity-oriented Investment Fund classification exists only to fix the capital-gains rate on the transfer of units, not to grant pass-through.
A worked example
Fund TI, a Category III AIF, invests 78% of its proceeds directly in listed Indian equity shares — comfortably over the 65% threshold — so it is treated as an Equity-oriented Investment Fund.
An investor holding Class A units, bought at Rs 1,000 and sold at Rs 1,225 after more than 12 months, earns a long-term capital gain. Because Fund TI is equity-oriented:
Tax on Long-Term Capital Gain @ 12.5%
Had Fund TI instead invested only 40% of its proceeds in listed domestic equity — falling below the 65% and 90% tests — it would be a non-equity-oriented investment fund, and the same gain would instead be taxed at the investor's own slab rate, which for a top-bracket investor could mean 30% instead of 12.5%.
Why NISM asks about it
Chapter 9, section 9.3 (Taxation on transfer of units), defines "Capital Asset" and "Equity-oriented investment fund", explains the gap SEBI's AIPAC identified for Category III AIFs, and sets the 65%/90% tests with the resulting tax rates. Expect a question applying the 65% or 90% test to a fund's stated asset allocation, and one distinguishing this concept from the Section 115UB "Investment Fund" that governs Category I and II pass-through instead.
Common exam traps
- This is a Category III AIF-specific extension recommended by SEBI's AIPAC — it exists because ordinary "Capital Asset" and "equity-oriented fund" definitions did not originally cover Category III AIFs at all.
- Two different tests apply depending on structure: 65% direct investment in listed domestic equity, or a 90%-into-90% test where the Category III AIF invests through another exchange-traded fund.
- Do not confuse this with the Section 115UB "Investment Fund". That section is about Category I and II AIF pass-through on income the fund earns; this concept is about the tax rate on gains from transferring units of a Category III AIF, which Section 115UB does not cover.
- Failing the test does not exempt the gain from tax — it simply moves the gain to individual slab-rate taxation instead of the 20%/12.5% concessional rates.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- Investment FundUnder Section 115UB, a Category I or Category II AIF (or an IFSCA-regulated fund) established in India — the only AIFs given tax pass-through. Category III AIFs are outside the definition.
- Representative AssesseeThe capacity in which the trustee of an AIF set up as a trust is assessed to income tax under Sections 161 and 164 — paying on behalf of the beneficiaries so the same income is not taxed twice.
- Pass-through statusTax treatment under which a fund's income is not taxed in the fund but directly in its investors' hands — and which the Income Tax Act does not give a Category III AIF.
- AIPACSEBI's Alternative Investment Policy Advisory Committee, headed by Shri Narayan Murthy — its recommendations shape AIF valuation guidelines and proposals on Category III tax and GST.
- Health and Education CessA 4% cess levied on the aggregate of income tax and surcharge payable by a Category III AIF or its investors, raising the effective tax rate on every income head it applies to.