AIF Category II (Alternative Investment Fund — Category II)

AIF Category II is the SEBI bucket of Alternative Investment Funds that do not fit Category I and do not undertake leverage other than for routine operations. In practice, Cat II hosts the bulk of India's private-equity, private-credit, real-estate-debt, and distressed-asset funds.

Minimum investor commitment is Rs 1 crore. Minimum fund corpus is Rs 20 crore. Cat II funds are close-ended, typically 5-8 year tenor, and illiquid. They are mandated to file private placement memoranda (PPMs) with SEBI and submit quarterly NAV reports.

Tax treatment: Cat II AIFs enjoy tax pass-through for capital gains, dividend, and interest. Business income remains taxed at fund level. The Finance Act 2023 also brought TDS at 10% on income paid by Cat I/II AIFs to resident investors.

Common Cat II strategies: private equity / growth equity in mid-market unlisted companies; private credit / structured debt; real-estate debt; pre-IPO; long-only listed-equity AIFs (often as alternative to large-cap mutual funds for HNIs); fund-of-funds.

Example 1: An investor commits Rs 1 crore to a Cat II private-credit fund yielding ~15% gross. Interest is taxed in the investor's hands at slab rate; TDS at 10% is deducted by the fund. The fund's tenor is 5 years with quarterly drawdown.

Example 2: A Cat II long-only listed-equity AIF generates LTCG of Rs 50 lakh for an investor in year 4. The LTCG is passed through and taxed at 12.5% above Rs 1.25 lakh threshold — same as if the investor held the equity directly.

Cat II is the workhorse category for HNI alternative allocations but illiquidity and J-curve must be respected.

Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not provide personalized AIF or product-recommendation advice.