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Alternative Investment Funds have been regulated in India since May 2012 — the framework that lets a fund manager short, leverage, and concentrate in ways a mutual fund never can. Three categories, one ₹1 crore entry ticket, and rules that were rewritten twice in the last year alone. Here's what SEBI actually permits, in each category, with nothing rounded off.
Dropping to ₹25 lakh for employees or directors of the AIF or its manager — and for angel fund investors, since September 2025.
The category isn't a marketing label — it decides what the fund is allowed to touch, whether it can borrow, and how your gains get taxed.
Funds investing in sectors the government, SEBI or another regulator considers socially or economically desirable — and which may qualify for incentives as a result.
Everything that isn't Category I or III lands here — private equity, private credit and debt funds, and funds of funds. No specific incentives, but no specific restriction beyond the baseline rules either.
Funds free to run diverse or complex trading strategies — including through listed and unlisted derivatives — and to employ leverage. This is where India's hedge funds and PIPE funds sit.
| Category I | Category II | Category III | |
|---|---|---|---|
| Minimum investor ticket | ₹1 crore (₹25 lakh for angel fund investors) | ₹1 crore | ₹1 crore |
| Minimum scheme corpus | ₹20 crore (₹10 crore for Angel Funds) | ₹20 crore | ₹20 crore |
| Sponsor/manager continuing interest | Lower of 2.5% of corpus or ₹5 crore | Lower of 2.5% of corpus or ₹5 crore | Lower of 5% of corpus or ₹10 crore |
| Leverage / derivatives | Not permitted | Only for day-to-day operational needs | Permitted, including for hedging and strategy |
| Fund structure | Close-ended, minimum 3-year tenure | Close-ended, minimum 3-year tenure | Open-ended or close-ended |
| Custodian | Mandatory once corpus exceeds ₹500 crore | Mandatory once corpus exceeds ₹500 crore | Mandatory regardless of corpus size |
| Government/SEBI incentives | May be eligible | None specific | None specific |
Section 115UB of the Income-tax Act draws the line — since 1 April 2026 it sits, unchanged in substance, as a renumbered provision of the new Income Tax Act, 2025. Category I and II get pass-through. Category III doesn't.
Under Section 115UB, income other than business income skips the fund entirely.
Finance Act 2025 amended Section 2(14) so that securities held by a Section 115UB fund now count as capital assets — pushing most trading gains into capital gains rather than business income. Business losses stay trapped at the fund level; other losses pass through unless your units were held under 12 months.
No statutory pass-through. The fund settles the tax bill first.
Where income does flow through on non-specified securities, it's taxed under Section 115AD at concessional rates. Exact treatment turns on whether the fund's trust deed is determinate or indeterminate — this is genuinely a case-by-case call, not a fixed rate.
AIF investments are subject to market risk, including leverage and derivative exposure in Category III. Read the fund's Private Placement Memorandum (PPM) before committing capital. Tax treatment reflects rules in force as of this year and can change with future Finance Acts — this is not tax advice; speak to a chartered accountant for your specific position.
A new Regulation 17A lets Category I and II AIFs offer co-investment opportunities to accredited investors through a shelf placement memorandum filed via a merchant banker, on exit terms no more favourable than the main scheme's. Separately, angel funds may now raise capital only from accredited investors, lose their fixed minimum-ticket requirement, can no longer launch new "schemes," and must structure each deal between ₹10 lakh and ₹25 crore with at least two accredited investors.
SEBI has defined an "Accredited Investors only fund" — an AIF, or scheme of one, where every investor apart from the manager, sponsor, or their employees/directors is an accredited investor. This class folds in the existing Large Value Fund for Accredited Investors, and funds launched before this amendment may apply to convert into it, subject to conditions SEBI is still expected to specify.
Before 2012, only the SEBI (Venture Capital Funds) Regulations, 1996 existed — and registering under them was optional for most private pools of capital.
The SEBI (Alternative Investment Funds) Regulations, 2012 come into force on 21 May 2012, creating the three-category structure and making registration with SEBI mandatory.
The Finance Act, 2015 inserts Section 115UB of the Income-tax Act, granting statutory pass-through status to Category I and II AIFs for non-business income.
The Finance Act, 2025 amends Section 2(14), classifying securities held by Section 115UB funds as capital assets — removing ambiguity over whether trading gains count as business income.
SEBI's Second Amendment Regulations, 2025 formalise co-investment schemes and restrict angel fund capital-raising to accredited investors.
The Third Amendment Regulations, 2025, notified 18 November 2025, formally introduce the Accredited Investors only fund category.
