Decoding Carried Interest: A Global and India Perspective

Siddharth Shah and Bijal Ajinkya discuss the origins, structure and regulatory changes around carried interest, a topic making waves in the world of private equity and venture capital. Carried interest is the share of profits of an investment fund that is paid to the fund manager as compensation linked to the performance of the fund. In the context of alternative investment funds (AIFs), carried interest is generally distributed to the fund sponsors and managers in the form of additional profits from the trust on the units that they hold, which are often represented to a different class. The additional distribution to the carry unit is typically distributed after the investors have received back their initial capital contribution plus a specified minimum return, also known as the hurdle rate. They further discuss tax and regulatory developments that are impacting the current environment, including the Karnataka High Court’s pass-through ruling involving ICICI Ventures and SEBI’s December 2024 circular that introduced guidelines to ensure pari passu rights for all participants in the AIF. Globally, there are two distinct approaches being taken - some jurisdictions are moving to increase the tax burden on carried interest, while others are trying to be more competitive. For instance in the UK, cashed interest will be taxed as trading profits from April 2026, while Luxembourg will see carried interest being taxed at a much lower rate, making it an attractive hub for AIF managers.