Internationally, VC Funds are treated as pass through vehicles which helps to eliminate income tax at the pool level.

A pass through status is desirable for all funds because their IRR will be higher as the sale proceeds can be passed on to the investors without payment of any taxes.

This is to avoid double taxation of the same stream of income and make such investment fall under single taxation.In India, venture capital funds which are registered with market regulator SEBI are eligible to a tax pass through status.

The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have replaced the SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) from 21st May, 2012.

This amendment will take effect from 1st April, 2013 and will apply in relation to assessment year 2013-14 and the subsequent assessment years.These regulations govern onshore funds that have been set up in India to raise capital for the purposes of investment in India.

The following points are to be noted while claiming such exemptions.Funds should be perceived to have positive spillover effects on economy.Funds should be of a minimum size of Rs.20 crore, and that each investor should have pooled a minimum of Rs.1 crore in the venture capital fund.Investors will be directly responsible for payment of taxes depending on their tax status.This regulation governs all funds which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.