As per SEBI Regulations Category, I AIF is one of the broad categories of AIF that
invest in early-stage start- ups, SMEs, and social ventures that the government or
regulators consider socially or economically desirable. It includes Venture Capital
funds, SME Funds, Social Venture funds, Infrastructure Funds, and Angel Funds.
As per SEBI Regulations Category, I AIF are AIFs that invests in early-stage startups, social
ventures, SMEs, infrastructure startups, or other sectors or areas which the government considers
socially or economically desirable. It includes investments such as venture capital funds, SME
Funds, social venture funds, infrastructure funds, etc.
Source: SEBI (June 2023)
General Conditions for Category I AIFs
Allowed to invest in units of other Category I AIF of the same sub-category or units of Category
II AIF.
May engage in activities such as hedging, including credit default swaps.
Shall not borrow funds directly or indirectly, and not engage in any leverage apart from meeting
provisional funding requirements.
Category I AIFs include
Venture Capital Fund
Infrastructure Fund
Angel Fund
Social Impact Fund
SME Fund
What is the minimum amount needed to invest in AIF?
All AIF categories in India except "angel fund" need a minimum investment of Rs. 1 crore, whereas,
for the angel fund, that amount is Rs. 25 lakhs. In the case of an employee or director of AIF, the
minimum value of investment shall be Rs. 25 lakhs
Why are Category I AIFs popular?
Category I AIFs are the most popular among investors. These are investments in small, or medium
enterprises, or start-ups that have high-growth potential, and are socially and economically viable.
These usually have the potential to grow the economy and create jobs, and hence Category I AIFs are
encouraged and promoted by the government and are extremely valuable to start-ups in our country.
When it comes to taxation, Category I AIFs have a pass-through status. This means that
any income (except for business income) that the fund generates, is taxed to the investor and not to the
fund house - even if the investor has not redeemed the investment. The investors need to pay taxes
according to their respective tax slabs.
Therefore, if you invest in category I AIF, you need to pay capital gain tax on the profit or loss you
make from the AIF funds within a given duration. The duration here is important to understand whether
long-term capital gain tax or short-term capital gain tax would be applied. As per the recent rules for
LTCG, 20% is the rate of tax with indexation benefit. If the profits are taxed as STCG,
then the rate would be 15%. There is a surcharge, and cess charges on and above the mentioned tax rates
as well. Any income (except business income) distributed by the investment fund is not liable for DDT
and TDS of 10% will be deducted by the investment fund. It is to be noted that in Category I AIF the
investor needs to pay advance tax during the year.
Natural of Income Earned by the Fund
Taxability
Tax Rate
Other than business income ( For example capital gains )
Passed through - AIF does not pay any tax. The unit holder pays the tax
Rates applicable to the unit holder
Business Income
Taxed at AIF. Such income is not taxable for unit holder
AIF was formed as a company or LLP. Taxed at the rates applicable to the company or the LLP.
AIF formed as Trust: Taxed at Maximum Marginal Rate*.
Disclaimer: However, it is advisable to consult your individual tax
advisor and keep track of regulatory changes