AIF Categories Explained: Category I, II and III Compared

AIF categories are the three groups into which SEBI sorts every alternative investment fund under the SEBI (Alternative Investment Funds) Regulations, 2012: Category I backs start-ups, SMEs, infrastructure and social ventures, Category II holds private equity, private credit and real estate, and Category III runs listed-market trading strategies that may use leverage. All three carry a ₹1 crore minimum commitment, but tenure, liquidity, leverage and tax treatment differ sharply, and those differences decide which category fits you.

Alternative investment fund meaning

An alternative investment fund (AIF) is a privately pooled vehicle registered with SEBI that invests under a defined policy in assets beyond listed shares and bonds, for high-net-worth individuals, family offices and institutions. Compare it with PMS, SIF and the AIF solution page.

AIF categories at a glance

Category I AIF: start-ups, SMEs and infrastructure

A Category I AIF invests in areas SEBI and the government consider economically or socially desirable, with at least two-thirds of investible funds (three-quarters for SME, social impact and infrastructure funds) in unlisted securities of the target sector. SEBI recognises six sub-types:

• Venture Capital Funds: start-ups from seed to Series B.
• Angel Funds: pre-revenue start-ups; open only to accredited investors and the fund's key personnel since SEBI's September 2025 amendment, which also removed the earlier ₹25 lakh minimum commitment and ₹5 crore corpus.
• SME Funds: growth capital for small and medium enterprises.
• Social Impact Funds (formerly Social Venture Funds): businesses with a social objective and financial returns.
• Infrastructure Funds: roads, renewable energy, logistics and data centres.
• Special Situation Funds: stressed loans and IBC assets; ₹10 crore minimum (₹5 crore for accredited investors), ₹100 crore minimum corpus.

Borrowing is barred except for temporary needs: up to 30 days, at most four times a year, never above 10 per cent of investible funds. Capital is usually locked for seven to twelve years.

Category II AIF: private equity and private credit

Category II is SEBI's residual category for any fund that is neither Category I nor Category III: private equity, private credit, real estate, structured credit, fund of funds, secondaries, pre-IPO and distressed asset funds. It is the largest category by commitments raised.

Every scheme is close-ended with a minimum tenure of three years from first close (SEBI circular of 17 November 2022); most run seven to ten years for equity and three to seven for credit. Borrowing may only bridge operational mismatches. You commit capital upfront and the fund calls it in tranches, often about 25 per cent at first close and the rest over 12 to 24 months, so the unfunded commitment must stay liquid.

Category III AIF: long-only, long-short and quant strategies

A Category III AIF employs diverse or complex trading strategies and may use leverage, including through derivatives. Most invest in listed equities through long-only, long-short, quantitative, arbitrage, market-neutral, absolute return or event-driven strategies. Leverage is capped at two times NAV under SEBI's 2013 circular, so ₹100 crore of NAV cannot carry exposure above ₹200 crore. It is the only category that may be open-ended, with NAV disclosed at least monthly for open-ended and quarterly for close-ended schemes.

AIF minimum investment and investor limits

• ₹1 crore minimum commitment per investor; ₹25 lakh for employees or directors of the fund; no prescribed minimum for accredited investors.
• ₹20 crore minimum corpus per scheme.
• Up to 1,000 investors per scheme (the separate cap of 200 for Angel Funds was removed in September 2025).

You qualify as an accredited investor with annual income of ₹2 crore or more, net worth of ₹7.5 crore or more (at least ₹3.75 crore in financial assets), or income of ₹1 crore plus net worth of ₹5 crore, excluding your primary residence. By contrast, mutual funds have no such floor and PMS starts at ₹50 lakh.

AIF tenure, lock-in and liquidity

Tenure is the life of the fund; lock-in is the period in which you cannot exit. In close-ended Category I and II schemes routine redemption is unavailable, so the lock-in you experience is close to the full fund life, which can be extended by up to two years with approval of two-thirds of unit holders by value. Open-ended Category III schemes offer monthly or quarterly windows, but notice periods, gates and exit loads make them less liquid than a mutual fund.

AIF fees: management fee, carry and hurdle

AIF fees typically pair a management fee of 1 to 2.5 per cent a year with carried interest of 15 to 20 per cent of profits above a hurdle rate. Since SEBI's April 2023 circular every scheme must offer a Direct Plan with no distribution or placement fee, and Category III funds may pay distributors only trail commission out of the management fee.

AIF taxation in India for FY 2026-27

Category I and II AIFs are pass-through investment funds: the fund pays no tax on capital gains, interest or dividends, which are taxed in your hands with their character preserved. This was Section 115UB of the Income-tax Act, 1961, and from 1 April 2026 (FY 2026-27) it is Section 224 of the Income-tax Act, 2025. Business income is the exception, taxed at fund level. Listed equity gains attract 20 per cent short-term and 12.5 per cent long-term capital gains tax (the rates set in 2024 under Sections 111A and 112A of the 1961 Act and carried into the 2025 Act), while private credit interest is taxed at your slab, about 39 per cent for many HNIs with surcharge and cess. Distributions to residents carry 10 per cent TDS (Section 194LBB, now Section 393), a credit rather than your final liability.

Category III AIFs sit outside Section 224, so tax is paid at fund level, often at the maximum marginal rate of about 42.744 per cent with surcharge and cess, and you receive returns net of tax. Confirm your own position with a chartered accountant before investing.

Which AIF category suits whom

• Category I: you can leave capital untouched for 7 to 12 years and accept that some holdings will be written off.
• Category II: you want private equity compounding or contractual income beyond deposits, and can fund capital calls over 12 to 24 months.
• Category III: you want hedged or quant strategies with periodic liquidity, and can stay invested for a full market cycle of three years or more.

Read the placement memorandum before committing. For dollar-denominated exposure, see GIFT City funds.

Sanriya Finvest Pvt. Ltd., Pune, is an AMFI-registered mutual fund distributor (ARN-193359) and APMI-registered PMS distributor (APRN01056). As a distributor we explain how each AIF category works, share scheme documents and coordinate onboarding; the decision stays with you. Contact us to discuss which category fits your horizon.

Frequently asked questions

What is the minimum investment in an AIF? ₹1 crore per investor for a regular scheme in every category under SEBI rules. Fund employees or directors may invest ₹25 lakh, Special Situation Funds need ₹10 crore (₹5 crore for accredited investors), accredited investors have no prescribed minimum, and Angel Funds, open only to accredited investors since September 2025, no longer carry a ₹25 lakh floor.

Is there a lock-in period for AIFs? Category I and II AIFs are close-ended with a three-year minimum tenure, and because routine redemption is unavailable your capital usually stays committed for most of a seven to ten year fund life. Category III AIFs may be open-ended with monthly or quarterly windows, subject to notice periods, gates and exit loads.

How is AIF income taxed in India? For FY 2026-27, Category I and II AIFs are pass-through investment funds under Section 224 of the Income-tax Act, 2025 (Section 115UB of the 1961 Act until 31 March 2026): gains, interest and dividends are taxed in your hands, with 10 per cent TDS for residents. Category III AIFs pay tax at fund level, often about 42.744 per cent. Confirm your position with a chartered accountant.