Tax Receivable Agreement – What Is It and How Is It Created?"

When companies go public, a lot changes. But one thing that often gets overlooked is how tax planning turns into real money — not just for the business, but for early investors too. That’s where Tax Receivable Agreements (TRAs) come in.

Let’s break this down simply.

What is a TRA?

Imagine you have helped build a company from scratch. Now it is going public. As a pre-IPO shareholder, you’ve already added tremendous value — so shouldn't you benefit from the company’s future tax savings too?

A Tax Receivable Agreement (TRA) makes that happen.

It’s a contract between the newly public company and its early shareholders. Under this deal, the company shares a part of its future tax savings — typically from depreciation, amortisation, or past losses — with those shareholders.

Think of it like an annuity, tied to the company’s ongoing success. You’re not just investing in a company, but in its ability to reduce taxes — and that’s a smart long-term play.

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Where Do TRAs Come Into Play?

TRAs are usually set up during big corporate moments — IPOs, mergers, or large-scale restructurings. Legal and tax advisors identify what tax attributes the company brings to the table and calculate the value these can unlock in the future.

From there, a TRA is drafted — specifying how long payments will last, what percentage of tax savings will be shared, and under what terms.

For pre-IPO shareholders, this creates predictable income potential, often for 10–15 years.

If you are looking to earn predictable returns outside of equity markets, look no further.

Explore Bajaj Finance Fixed Deposits with attractive interest rates of up to 8.60% p.a., flexible tenures, and monthly or quarterly payout options. Open FD Account.

Why Do Investors Look at TRAs?

Simple — they are structured, long-term, and tied to real tax advantages.

By investing in TRAs, you get a share of the company’s future tax savings. But this isn’t for short-term traders. The value depends on the company’s taxable profits and how effectively it uses its deductions.

If the company thrives and reduces its tax bill significantly, you earn more. If not, your returns may shrink.

Pro Tip: Just like TRAs, Fixed Deposits are about long-term certainty. While one rides on corporate tax efficiency, the other offers assured returns regardless of market volatility. Check FD Rates.

Investing in TRAs: Opportunity or risk?

TRAs present a unique investment opportunity—but they are not for everyone. Here is what you should know:

Investors can purchase the right to receive TRA payments, giving them a share of future tax savings

Returns are tied to the company’s profitability and tax strategy

They often span 10 to 15 years, making them long-term plays

So, if you are investing in TRAs, you need to believe in the company’s ability to grow profits and utilise its tax benefits. Otherwise, returns could fall short.

Looking for more predictable returns in the short-to-medium term? A Fixed Deposit might be a better fit—no stock market exposure, just steady compounding. Get up to 8.60% p.a. returns, open FD.

Why Tax Receivable Agreements matter

TRAs are more than a niche tax concept—they offer strategic value for both companies and investors. Here's why they’re important:

Boost IPO value: TRAs make IPOs more rewarding for early shareholders

Align incentives: They encourage long-term commitment by syncing shareholder and company interests

Improve financial planning: TRAs help companies manage tax savings more efficiently

Appeal to investors: A stream of future payments can attract capital from income-focused investors

Differentiate companies: TRAs showcase financial innovation, setting firms apart in the capital markets

How are TRAs created

TRAs are established during the process of a company transitioning from private to public ownership, such as during an IPO or a merger. The creation involves identifying tax attributes that can generate future savings for the company. Legal and financial advisors then draft the TRA, outlining the terms under which the company will share these savings with pre-IPO shareholders. The agreement specifies the percentage of tax savings to be shared, the duration of payments, and other relevant conditions. Once finalised, the TRA becomes a binding contract, ensuring that pre-IPO shareholders receive their agreed-upon share of tax benefits as the company realises them.

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Why are TRAs important

Tax Receivable Agreements (TRAs) play a crucial role in modern corporate finance, offering benefits to both companies and investors.

Enhancing IPO appeal: TRAs make IPOs more attractive to pre-IPO shareholders by providing them with a mechanism to benefit from future tax savings.

Aligning interests: By sharing tax savings, TRAs align the interests of pre-IPO shareholders with those of the company, encouraging long-term commitment.


Financial planning: TRAs provide companies with a structured approach to manage and utilise tax attributes, aiding in financial planning and forecasting.


Investor attraction: The potential for steady, long-term returns makes TRAs appealing to investors seeking predictable income streams.

Market differentiation: Companies utilising TRAs can differentiate themselves in the market by showcasing innovative financial strategies.

Final thoughts: Should you care about TRAs?

If you're an investor or stakeholder in a company preparing for an IPO, understanding TRAs can give you a valuable edge. These agreements provide a structured way to share tax savings—offering a blend of tax efficiency and income generation.

But like any long-term investment, TRAs come with risks tied to business performance. If you are looking to balance such exposure with stable, guaranteed instruments, Fixed Deposits can offer that peace of mind.

With flexible tenures and interest payouts of up to Rs. 2,38,072 on a Rs. 5 lakh investment of 60 months, Bajaj Finance FDs are a great way to diversify your portfolio—especially when paired with strategic investments like TRAs. Check rates!

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