Taxation, Valuation and Investor Servicing
What the exam tests
This domain tests the investor-facing mechanics after subscription: how AIF income is taxed, how units are valued, how capital calls and distributions work, and what servicing standards apply.
Tax treatment
Category I and II AIFs generally receive pass-through treatment for income other than business income, so investors are taxed broadly as if they had invested directly, subject to conditions. Business income is treated differently at the fund level. Distributors should not give personalised tax advice; they should explain the pass-through concept and direct investors to a tax adviser for their own position. Category III treatment differs and should not be assumed to be the same.
Valuation and NAV
AIF units are valued periodically using fair-value principles. Independent valuation may be required for certain assets, and the valuation policy should address conflicts, stale prices and illiquid holdings. NAV is reported to investors, but it is not a daily redemption price for closed-ended Category I and II schemes.
Capital calls, distributions and servicing
Investors commit capital and receive drawdown notices. Distributions may be in cash or in specie. Redemption before maturity is generally restricted for closed-ended schemes. Servicing includes statements, grievance redressal and timely communication of material events.
Worked example
An investor receives a Rs 10 lakh distribution from a Category II fund and asks whether it is tax-free dividend. The distributor should explain that pass-through treatment means the investor generally reports the income according to its nature, subject to conditions, and should refer the investor to a tax adviser. The distributor should not label the distribution as assured or tax-free.
Traps that cost marks
Do not say AIF units are redeemable daily at NAV; do not ignore capital-call default consequences; do not give personalised tax assurances; do not treat a distribution as guaranteed income; do not confuse pass-through treatment across categories.