Category II AIF
The broadest and most prevalent AIF category in India — encompassing private equity, real estate, debt, and distressed asset funds — operating without leverage beyond day-to-day operational needs, with pass-through tax treatment.
- check_circleDoes not fall under Category I or III
- check_circleNo leverage beyond day-to-day operations
- check_circlePass-through taxation at investor level
- check_circlePrivate equity, debt and real estate
- check_circleClose-ended, min. 3-year tenure
SEBI Definition
Under Regulation 3(4)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012, Category II AIF means an alternative investment fund that does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted under these regulations.
SEBI AIF Regs, 2012 — Reg. 3(4)(b)
₹5.67 Lakh Crore+ AUM (FY 2024)
Largest AUM category among all three AIF classes
Why Category II AIFs Exist
Category II is a residual category — a deliberate design by SEBI to provide a regulated framework for all private market investment strategies that do not qualify as socially desirable (Category I) or employ complex leveraged trading (Category III). It is the institutional home of private equity, private credit, real estate, and distressed investing in India.
These funds serve a critical role in India's capital formation ecosystem, channelling long-duration institutional capital into businesses, assets, and credit markets that are inaccessible through listed markets. The close-ended, illiquid nature of Category II AIFs aligns investor horizons with the underlying asset's value creation cycle.
SEBI Circular Reference
SEBI has issued master circulars for AIFs consolidating all operational guidelines — most recently SEBI/HO/AFD/AFD-PoD-1/P/CIR/2023/130 dated July 31, 2023, covering registration, reporting, and investor protection norms applicable to Category II funds.
Fund Types
Private Equity Funds
Acquire controlling or significant minority stakes in established unlisted companies to drive operational improvement, management restructuring, and long-term enterprise value creation. Target IRR: 18–25%. Tenure: 5–8 years.
View Funds arrow_forward paymentsDebt Funds
Provide structured credit to private companies through Non-Convertible Debentures (NCDs), mezzanine instruments, and other credit solutions. Offer predictable yield of 12–18% p.a. against collateral packages.
View Funds arrow_forward apartmentReal Estate Funds
Deploy capital into income-generating commercial, residential, and logistics real estate through structured equity or preferred debt. Offer rental yield plus capital appreciation with hard asset collateral.
View Funds arrow_forward warning_amberDistressed Asset Funds
Acquire NPA portfolios, stressed companies under IBC resolution, and sub-performing assets at significant discounts to intrinsic value. Returns driven by operational turnaround or insolvency resolution.
View Funds arrow_forwardRegulatory Requirements
gavelSEBI Registration
- check_circleMandatory registration with SEBI before any fundraising or investment activity
- check_circleApplication via Form A with track record, due diligence documents, and draft PPM
- check_circleRegistration fee: ₹5 Lakh (application) + ₹15 Lakh (registration) + ₹1 Lakh p.a. (annual fees)
- check_circleSeparate SEBI registration required for each AIF entity; schemes under same entity permitted
gavelFund Structure
- check_circleMinimum corpus: ₹20 Crore per scheme (₹10 Crore for angel funds)
- check_circleMaximum 1,000 investors per scheme (excluding employees and directors)
- check_circleMinimum investment by each investor: ₹1 Crore (₹25 Lakh for employees/directors)
- check_circleMandatorily close-ended with minimum tenure of 3 years from final close
gavelInvestment Manager Obligations
- check_circleManager/Sponsor must contribute ≥2.5% of corpus or ₹5 Crore, whichever is lower (skin-in-the-game)
- check_circleInvestment Manager must be a body corporate registered in India
- check_circleKey Investment Team (KIT) members must be disclosed and are subject to lock-in
- check_circleMinimum net worth requirement for Investment Manager: ₹5 Crore
gavelDisclosure & Reporting
- check_circlePrivate Placement Memorandum (PPM) mandatory — must be filed with SEBI 30 days prior to launch
- check_circleQuarterly investor reports with portfolio details, NAV, and performance
- check_circleAnnual SEBI reporting via SEBI Intermediary Portal (SIP)
- check_circleMaterial change in PPM requires 15 days prior SEBI intimation and investor consent
gavelOperational Compliance
- check_circleCustodian mandatory for securities (SEBI-registered Custodian)
- check_circleSeparate bank account and demat account for each scheme
- check_circleNo co-mingling of assets across schemes or with proprietary assets
- check_circleAppointment of SEBI-registered auditor for annual financial statements
gavelLeverage Restrictions
- check_circleLeverage strictly prohibited except for day-to-day operational requirements
- check_circleNo borrowing to fund portfolio investments under any circumstance
- check_circlePortfolio companies may themselves use leverage; this is permissible
- check_circleDebt funds may invest in leveraged companies — issuer-level vs. fund-level distinction
Tax Treatment
Pass-Through Status — Section 115UB
Category II AIFs are granted pass-through tax treatment under Section 115UB of the Income Tax Act, 1961 (inserted by Finance Act, 2015). Income (other than business income) accruing or arising to the AIF is not taxed at the fund level. It is deemed to be the income of the investor in the same proportion as their capital contribution and is taxed at the investor's applicable rate in the year of accrual — irrespective of actual distribution.
Taxed at 10% (plus applicable surcharge and cess) on gains exceeding ₹1 Lakh, after 12 months of holding. (Sec 112A)
Taxed at 15% (plus surcharge and cess) for equity shares held less than 12 months, per Section 111A.
LTCG on unlisted shares after 24 months: 20% with indexation benefit. STCG: As per investor's applicable income tax slab.
Business income earned by the AIF is taxed at the fund level at Maximum Marginal Rate (~42.744%) before pass-through to investors.
TDS on Distributions
As per Finance Act 2023, Category II AIFs are required to deduct TDS at 10% on income distributed to resident investors. TDS at applicable treaty rates or 20% (whichever is lower) applies to non-resident investors. The AIF must file TDS returns (Form 26Q / 27Q) quarterly with the Income Tax Department.
Key Characteristics at a Glance
Minimum Corpus
₹20 Crore
per scheme
Min. Investor Ticket
₹1 Crore
₹25L for employees
Max. Investors
1,000
per scheme
Fund Structure
Close-Ended
mandatory
Minimum Tenure
3 Years
from final close
Leverage
Not Permitted
fund level
Taxation
Pass-Through
Sec. 115UB IT Act
Skin-in-the-Game
2.5% / ₹5 Cr
whichever is lower
Investor Eligibility
Who Can Invest?
- person_checkResident individuals with ₹1 Crore minimum investment
- person_checkHindu Undivided Families (HUFs)
- person_checkBodies corporate, LLPs, and partnership firms
- person_checkTrusts, societies, and endowments
- person_checkForeign Portfolio Investors (FPIs) subject to FEMA limits
- person_checkNon-Resident Indians (NRIs) on repatriation/non-repatriation basis
- person_checkEligible employees and directors of AIF/Manager at ₹25 Lakh minimum
Key Investor Rights
- shieldRight to receive audited accounts and quarterly reports
- shieldRight to inspect books of accounts on demand
- shieldConsent required for material changes to PPM
- shieldSEBI SCORES portal available for grievance redressal
- shieldRight to removal of Investment Manager through 75% majority vote
- shieldPriority in distribution of proceeds over co-investment by Manager
- shieldRepresentation on Advisory Board/Investor Committee per PPM terms
Explore Category II Funds
Browse registered Category II AIFs — private equity, debt, real estate, and distressed — available through PlatAlt's platform.