In a major relief to foreign investors, the government today clarified that income arising from transfer of unlisted shares by certain categories of alternative investment funds will not be liable for taxation.

The Central Board of Direct Taxes (CBDT) said income from transfer of unlisted shares would not be taxed in the case of certain categories of Alternative Investment Funds (AIFs) registered with markets regulator Sebi.

The exemption would be applicable for Category I and II AIFs.

Income from transfer of unlisted shares is being considered as capital gains and liable for taxation, a scenario which was seen as a hurdle for foreign entities investing in the country's stock market.

Category-I AIFs are funds that receive incentives from the government, Sebi or other regulators. This include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds.

Category-II entities can put in their money anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. Private equity funds, debt funds or fund of funds, among others come under this category.

IVCA (Indian Private Equity and Venture Capital Association) Chairman Gopal Srinivasan said the investor community welcomes this clarification before the budget. Great collaboration between the industry and government to pursue the goals of ease of doing business and manage in India, he added.

"Primarily, Sebi registered Category I and II AIFs invest in unlisted shares of ventures, many of which are new set ups or start ups, and thus, some form of control and management of the underlying business many be required to be exercised by such AIFs to safeguard the interest of investors," the circular said.