Venture Capital Companies enjoyed exempt income where specified conditions are met. These were pass through entities, i.e. the tax is payable on distribution to Venture Capital Company investors.

Now this exemption has been extended even to Category 1 Alternative Investment Fund registered Venture capital Fund and regulated by SEBI. This is applicable where it is not listed, 2/3rd of its investible funds are invested in unlisted securities and where their directors or related parties do not hold more than 10% equity in companies where they invest.

The Finance Minister in Union Budget 2013 has also stated that the Securities and Exchange Board of India will prescribe requirements for angel investor pools by which they can be recognised as Category I AIF Venture Capital Funds.

Under SEBI (Alternative Investment Funds) Regulations, 2012, Category I AIF include Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds and such other Alternative Investment Funds.

One of ardent appeals of investors was to extend the tax pass-through status to all categories of Alternate Investment Funds (AIF). However, the Budget proposals provide for tax pass-through only to funds which are registered as Category I - AIF under the sub-category of Venture Capital Funds (subject to fulfillment of certain conditions).

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