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.
- Does not fall under Category I or III
- No leverage to invest; short-term borrowing only (30 days, 4x a year, 10% of investable funds)
- Pass-through taxation at investor level
- Private equity, debt and real estate
- Close-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 FundsDebt 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 FundsReal 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 FundsDistressed 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 FundsRegulatory Requirements
SEBI Registration
- Mandatory registration with SEBI before any fundraising or investment activity
- Application via Form A with track record, due diligence documents, and draft PPM
- Application fee: ₹1 Lakh + 18% GST. Registration fee on approval: ₹10 Lakh + 18% GST
- Scheme fee: ₹1 Lakh + 18% GST per scheme, payable when the placement memorandum is filed. The first scheme launched by an AIF is exempt. There is no annual or recurring SEBI fee
- Co-investment schemes: ₹1 Lakh to file a shelf placement memorandum, filed through a merchant banker at least ten working days before launch
- Separate SEBI registration required for each AIF entity; schemes under same entity permitted
Fund Structure
- Minimum corpus: ₹20 Crore per scheme (₹10 Crore for angel funds)
- Maximum 1,000 investors per scheme (excluding employees and directors)
- Minimum investment by each investor: ₹1 Crore (₹25 Lakh for employees/directors)
- Mandatorily close-ended with minimum tenure of 3 years from final close
Investment Manager Obligations
- Manager/Sponsor must contribute ≥2.5% of corpus or ₹5 Crore, whichever is lower (skin-in-the-game)
- Investment Manager must be a body corporate registered in India
- Key Investment Team (KIT) members must be disclosed and are subject to lock-in
- Minimum net worth requirement for Investment Manager: ₹5 Crore
Disclosure & Reporting
- Private Placement Memorandum (PPM) mandatory — must be filed with SEBI 30 days prior to launch
- Quarterly investor reports with portfolio details, NAV, and performance
- Annual SEBI reporting via SEBI Intermediary Portal (SIP)
- Material change in PPM requires 15 days prior SEBI intimation and investor consent
Operational Compliance
- Custodian mandatory for securities (SEBI-registered Custodian)
- Separate bank account and demat account for each scheme
- No co-mingling of assets across schemes or with proprietary assets
- Appointment of SEBI-registered auditor for annual financial statements
Leverage Restrictions
- No borrowing or leverage to make investments. Short-term borrowing is permitted only to meet temporary funding requirements and day-to-day operational needs — for no more than 30 days at a time, on no more than four occasions a year, and up to 10% of investable funds
- A 30-day cooling-off period applies between two borrowings, counted from repayment of the previous one
- Borrowing to cover a shortfall in investor drawdown is permitted as a last resort, capped at the lowest of 20% of the proposed investment, 10% of the scheme’s investable funds, or the commitment pending from non-defaulting investors — disclosed in the PPM, with the cost borne by the defaulting investors
- Portfolio companies may themselves use leverage; this is permissible
- Debt funds may invest in leveraged companies — issuer-level vs. fund-level distinction
Tax Treatment
Pass-Through Status — Section 224
Category II AIFs are granted pass-through tax treatment under Section 224 of the Income-tax Act, 2025 (introduced as Section 115UB by the 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 12.5% (plus applicable surcharge and cess) on gains exceeding ₹1.25 Lakh, after 12 months of holding. (Sec. 198, IT Act 2025)
Taxed at 20% (plus surcharge and cess) for equity shares held less than 12 months, per Section 196 of the Income-tax Act, 2025.
LTCG on unlisted shares after 24 months: 12.5% without indexation. 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
Under Section 393(1) (Table: Sl. No. 4(iii)) of the Income-tax Act, 2025 — successor to Section 194LBB of the 1961 Act, introduced by the Finance Act, 2015 — a Category II AIF deducts tax at 10% on income credited or paid to resident unit holders, with no threshold. This applies to all streamed income, not only interest. For non-resident and foreign-company unit holders, Section 393(2) (Table: Sl. No. 8) requires withholding at the rates in force: the Finance Act rate for the character of income streamed, or the applicable treaty rate on production of a tax residency certificate. Where no character-specific rate applies, the residual rates are 30% for a non-corporate non-resident and 35% for a foreign company, plus surcharge and cess — there is no flat 20% rate, though Section 397(2) imposes a 20% floor where PAN is not furnished. The fund files quarterly withholding statements in Form 140 (residents) and Form 144 (non-residents), and reports streamed income annually in Form 79 to the department and Form 78 to each unit holder. Forms 26Q and 27Q apply only to periods up to 31 March 2026.
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
except short-term borrowing
Taxation
Pass-Through
Sec. 224, IT Act 2025
Skin-in-the-Game
2.5% / ₹5 Cr
whichever is lower
Investor Eligibility
Who Can Invest?
- Resident individuals with ₹1 Crore minimum investment
- Hindu Undivided Families (HUFs)
- Bodies corporate, LLPs, and partnership firms
- Trusts, societies, and endowments
- Foreign Portfolio Investors (FPIs) subject to FEMA limits
- Non-Resident Indians (NRIs) on repatriation/non-repatriation basis
- Eligible employees and directors of AIF/Manager at ₹25 Lakh minimum
Key Investor Rights
- Right to receive audited accounts and quarterly reports
- Right to inspect books of accounts on demand
- Consent required for material changes to PPM
- SEBI SCORES portal available for grievance redressal
- Right to removal of Investment Manager through 75% majority vote
- Priority in distribution of proceeds over co-investment by Manager
- Representation 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 Platizio Alternatives's platform.