AIF Category I/II (AIF)

TL;DR

India's SEBI-registered VC/PE fund vehicles: Category I (VC, SME, social, infra) and Category II (PE/debt), with pass-through tax and ₹1 Cr LP minimum.

Alternative Investment Funds (AIFs) are SEBI-registered private-investment fund vehicles introduced in 2012. Category I AIFs include venture capital funds, SME funds, social-impact funds, and infrastructure funds — all of which receive pass-through tax status (income taxed at LP level, not fund level). Category II AIFs include private-equity and most debt funds, also pass-through but without specific government incentives. Category III AIFs (hedge funds) are taxed at the fund level.

For Indian VC-backed founders, virtually every domestic Indian VC and PE fund is structured as a Category I or II AIF — Sequoia India (now Peak XV), Accel India, Lightspeed India, Blume Ventures all run domestic Category II AIFs alongside their offshore Mauritius/Singapore vehicles. Minimum LP commitment is ₹1 Cr, and the fund must commit at least 2.5% of corpus from the manager (manager skin-in-the-game).

Worked example

Peak XV Partners' India Fund VIII (₹3,000 Cr corpus) is structured as a SEBI Category II AIF with 2.5% GP commitment (₹75 Cr), 78 LPs each committing minimum ₹1 Cr. Pass-through taxation means a ₹100 Cr exit distribution is taxed at the LP level under each LP's residency status, not at fund level — preserving the 50–60% IRR before LP tax.

Common pitfalls

• Confusing Category I (venture, with government endorsement) with Category II (general PE) at fund-formation stage.
• Miscalculating LP-level tax treatment for non-resident LPs based on tax-treaty positions.
• Underestimating SEBI compliance overhead — annual filings, valuation requirements, LP reporting.

When this shows up in a pitch deck

Founders don't pitch this directly; relevant when explaining Indian-domiciled VC investors' fund structure on a cap table.

Related terms

• DPIIT-Recognised Startup — Indian government recognition (Startup India) for under-10-yr-old, sub-₹100 Cr-revenue innovative companies — unlocks tax holidays and angel-tax exemption.
• GIFT City Fund Structures — India's IFSC at Gandhinagar — tax-favoured (10-yr CT holiday, no STT), now a popular domicile for India-focused VC funds and family offices.
• FEMA / ODI Compliance — Indian FEMA and RBI Overseas Direct Investment rules governing inbound foreign equity, share-pricing minimums, and Indian residents' overseas investments.
• Convertible Notes (India) — Indian convertible-note rules (Companies Act + RBI FEMA): typically Compulsorily Convertible Debentures with a 5-yr maximum tenor and FEMA-compliant pricing.
• General Partner — A managing partner of a venture fund, responsible for sourcing, diligence, investment decisions, and value-add to portfolio companies.

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