SIFs follow the same capital gains framework as mutual funds, but the asset mix (equity, hybrid or debt‑style) decides whether you enjoy concessional STCG/LTCG rates or slab‑based taxation.
SIF and mutual fund taxation basics
Specialised Investment Funds are launched under mutual fund regulations, so taxation is at investor level with the same broad rules as mutual funds. Equity‑oriented SIFs (and equity mutual funds) face STCG if units are sold within 12 months and LTCG if sold after 12 months.
For equity‑oriented units, current rules tax STCG at around 20% and LTCG at 12.5% on gains above the annual exemption threshold (₹1.25 lakh on aggregate equity LTCG). In contrast, debt‑style funds bought after the April 2023 changes are taxed at your income‑tax slab rate without indexation, very similar to fixed deposits.
Equity SIFs vs equity mutual funds
An equity‑oriented SIF (long‑only, long‑short or thematic but maintaining equity classification) is taxed identically to an equity mutual fund at the investor level. If you sell within 12 months, the gain is equity STCG taxed at 20%; selling after 12 months creates equity LTCG taxed at 12.5% on the portion above ₹1.25 lakh in that year.
Because SIFs sit under the same section 10(23D) style pass‑through framework, there is no extra fund‑level tax leakage as you see in many Category III AIFs or PMS structures. That makes an equity SIF broadly as tax‑efficient as an equity mutual fund while allowing more complex strategies like long‑short or factor‑based portfolios.
Hybrid SIFs vs hybrid mutual funds
Hybrid and multi‑asset SIFs are taxed based on whether they qualify as equity‑oriented (typically ≥65% in domestic equity and permitted arbitrage) or fall into non‑equity territory. Equity‑oriented hybrid SIFs mirror equity hybrid mutual funds: STCG within 12 months at 20% and LTCG after 12 months at 12.5% above the ₹1.25 lakh exemption.
If a hybrid SIF runs with lower equity and is treated as debt‑oriented, gains are taxed like debt mutual funds bought under the new regime, i.e., added to your income and taxed at slab rate, regardless of whether you held 3 months or 3 years. This makes equity‑oriented hybrid SIFs clearly more tax‑efficient for investors in higher slabs than debt‑oriented hybrids, just like in the mutual fund space.
Debt‑style SIFs vs debt mutual funds
Debt‑focused SIFs that do not qualify as equity‑oriented are effectively treated like debt mutual funds for tax purposes. For new‑regime debt funds and debt‑oriented hybrids, there is no concessional LTCG rate: all gains are classified as short‑term and taxed at the investor’s slab, with indexation benefits removed for recent investments.
This means a high‑slab investor will typically pay up to 30% (plus surcharge and cess) on realised gains from debt‑style SIFs, similar to new‑regime debt mutual funds, even if the holding period is long. For low‑income investors within the basic exemption band, slab‑based taxation can still work out favourably because part or all of the gain can fall in a zero‑tax or low‑tax slab.
Where SIFs can be more tax‑efficient
The structural advantage of SIFs appears most clearly when you compare them to PMS and Category III AIFs rather than to mutual funds. PMS and many Cat III AIFs often face tax at the fund or business‑income level, whereas SIFs enjoy mutual‑fund‑style pass‑through and concessional capital gains on eligible equity‑oriented strategies.
For an investor choosing between an equity long‑short SIF and a similar strategy wrapped as a Cat III AIF, the SIF can deliver higher post‑tax returns because gains are taxed like equity mutual funds, not as business income at the highest slab. When comparing purely to mutual funds, the key message is simpler: across equity, hybrid and debt buckets, SIF taxation broadly tracks mutual fund rules, so the decision becomes one of strategy, risk and minimum ticket size rather than tax alone.