AIF Valuation
Category I vs Category II vs Category III AIF: Which SEBI Category Should You Choose?
Table of contents
- Key Takeaways:
- SEBI's Three AIF Categories — And Why the Choice Is (Almost) Permanent
- Category I AIF — Nation-Building Capital
- Category II AIF — The Residual Powerhouse
- Category III AIF — Active Strategies With Leverage
- Category I vs Category II vs Category III — Full Comparison
- How Pass-Through Taxation Actually Works for Category I & II
- Which Category Should You Choose? A Practical Decision Framework
- 2025-2026 Regulatory Reforms That Affect Your Category Decision
- 5 Common Mistakes When Choosing an AIF Category
- Closing Summary: Match the Category to the Strategy, Not the Tax Outcome
- Frequently Asked Questions — SaaS Valuation
📖 Part of our guide: Alternative Investment Fund (AIF) Valuation in India. This article breaks down SEBI's three AIF categories in detail, so fund sponsors and managers can choose the right structure before a Placement Memorandum is ever filed.
📌 For Fund Sponsors & Promoters — What You Must Know
SEBI's Alternative Investment Funds Regulations, 2012 do not treat "AIF" as one product. Category I, Category II and Category III are three legally distinct fund types with different investable universes, leverage rights, sponsor commitment obligations, and — critically — different taxation under the Income Tax Act.
Once an AIF has made investments under a category, SEBI generally does not allow it to change category. This guide compares all three in detail and lays out a practical framework for deciding which one actually fits your fund's strategy.
Every fund sponsor who has sat down to draft a Private Placement Memorandum eventually hits the same question on the very first page: which category do we register under? It looks like a formality — a dropdown choice on the SEBI Intermediary Portal — but it is one of the most consequential decisions in the life of the fund. The category determines what the fund can invest in, whether it can borrow or use derivatives, how much of the sponsor's own capital must sit alongside investor capital, whether investors are taxed directly or the fund pays tax first, and how open SEBI's ongoing scrutiny will be.
What makes this decision unusually final is a specific piece of regulatory plumbing: under SEBI circular CIR/IMD/DF/12/2013, an AIF can apply to change its category only if it has not yet made any investment under the category it was originally registered in. Once capital has been deployed, the category is effectively locked for the life of the fund. Choosing the wrong category is not a paperwork inconvenience to fix later — it usually means winding up the vehicle and starting again.
At Elite Valuation, we support fund sponsors and managers with the valuation work that sits underneath every AIF structuring decision — fair market value certification for portfolio company investments under Rule 11UA, NAV computation methodology for scheme-level reporting, and Ind AS fair value support for Category II and III portfolio marks. This guide lays out how the three categories actually differ, and how to think through the choice before you file.
Key Takeaways:
- Category I covers start-ups, SMEs, social ventures, infrastructure and special situations — sectors SEBI treats as socially or economically desirable — with pass-through taxation and no leverage
- Category II is the residual category for everything else, mainly private equity, private debt, real estate and fund-of-funds — and holds the bulk of India's AIF capital
- Category III is the only category permitted leverage (up to 2x NAV) and the only one that can be open-ended, but it does not get pass-through tax status
- Concentration limits differ sharply: 25% of investable funds per investee for Category I/II versus 10% for Category III (20% for Large Value Funds)
- Sponsor/manager commitment is 2.5% of corpus or Rs. 5 crore (whichever is lower) for Category I and II, rising to 5% or Rs. 10 crore for Category III
- Category I and II enjoy pass-through taxation under Section 115UB; Category III income is generally taxed at the fund level, commonly at the Maximum Marginal Rate for trust structures
- Once an AIF has made investments under a category, SEBI does not permit a change without a fresh application and, if funds are already raised, a penalty-free investor exit option
- 2025-2026 reforms — the Accredited Investors-only Fund category, a lower Rs. 25 crore Large Value Fund threshold, Co-Investment Vehicles, and the new GARUDA fast-launch mechanism — have materially changed the practical trade-offs between categories
📌 At a Glance — The Three SEBI AIF Categories
- Category I AIF — Venture Capital Funds (incl. Angel Funds), SME Funds, Social Venture Funds, Infrastructure Funds, Special Situation Funds. No leverage. Pass-through tax.
- Category II AIF — Private equity, private debt, venture debt, real estate, distressed asset and fund-of-funds structures. No leverage beyond operations. Pass-through tax.
- Category III AIF — Long-short, market-neutral, arbitrage, quant and PIPE strategies. Leverage up to 2x NAV. Taxed at the fund level, no pass-through.
SEBI's Three AIF Categories — And Why the Choice Is (Almost) Permanent
An Alternative Investment Fund is legally defined under Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 as a privately pooled investment vehicle — set up as a trust, company, LLP or body corporate — that raises capital from sophisticated Indian or foreign investors for investment according to a defined policy. Under Regulation 3(4), every applicant must seek registration in exactly one of three categories, and where applicable, one specific sub-category within it. The three are mutually exclusive by design: a fund cannot register as "Category I and II," and a strategy that blends unlisted early-stage investing with leveraged listed-market trading cannot sit inside a single AIF scheme at all.
The category is not a label attached after the fact — it is baked into the fund's registration certificate, its Private Placement Memorandum, and the way SEBI supervises it going forward. That is what makes the decision structurally different from most other choices a fund makes. Investment strategy can evolve within the boundaries of a category; the category itself effectively cannot, once money has moved.
✔ Why You Cannot Simply "Switch" Categories Later
- SEBI circular CIR/IMD/DF/12/2013 permits a change of category only for an AIF that has not made any investment under its existing category
- The manager must file a fresh application to SEBI along with the rationale for the proposed change
- If investor commitments have already been raised, investors must be given a penalty-free option to withdraw before the change proceeds
- Until SEBI approves the change, the AIF is restricted to parking funds in liquid schemes or bank deposits — it cannot deploy capital
Sagar's Insight: In practice, I have seen sponsors treat the category dropdown as a minor procedural step and only discover the mismatch once the fund is trying to write its first cheque into a leveraged listed-market strategy under a Category I registration meant for unlisted start-ups. By then, unwinding and re-registering costs months of runway and, often, investor confidence. The category decision belongs at the very start of fund design — before the PPM is drafted, not after the first close.
Category I AIF — Nation-Building Capital
Sectors SEBI Considers Socially or Economically Desirable
Category I AIFs exist to channel private capital into sectors the government and SEBI consider beneficial for India's long-term development — start-ups, early-stage ventures, SMEs, social enterprises and infrastructure. In exchange for accepting this narrower mandate and forgoing leverage entirely, Category I funds receive certain regulatory concessions that the other two categories do not. Within Category I, an applicant must additionally choose a sub-category, each with its own investment focus.
Venture Capital Funds (including Angel Funds)
Early-Stage & Growth-Stage Equity
- Invests primarily in unlisted equity or equity-linked instruments of start-ups and early-stage companies
- Angel Funds are a VCF sub-type built for pooling individual angel investors, with a lower minimum scheme corpus of Rs. 10 crore and a lower minimum investor commitment of Rs. 25 lakh
- Return profile depends almost entirely on eventual IPOs, acquisitions or strategic exits rather than periodic income
SME Funds
Listed & Unlisted Small and Medium Enterprises
- Must deploy a minimum of 75% of the fund's corpus into SME companies, listed or proposed to be listed on an SME exchange, or unlisted SMEs
- Typically combines growth equity with structured debt to meet SME capital requirements banks and NBFCs are reluctant to fill
Social Venture Funds
Impact-Led, Mission-Aligned Enterprises
- Invests at least 75% of investible corpus in unlisted securities of social ventures — enterprises with a defined social objective alongside a commercial one
- May accept muted return expectations from a portion of investors in exchange for measurable social outcomes
Infrastructure Funds
Long-Gestation, Capital-Intensive Assets
- Deploys patient, long-duration capital into roads, ports, power, telecom and urban infrastructure projects and SPVs
- Matches investor lock-in with the extended development timelines typical of infrastructure assets
Special Situation Funds (SSF)
Stressed & Distressed Credit — Higher Ticket Size
- Invests in stressed loans and securities of companies undergoing restructuring, turnaround or financial distress
- Carries a materially higher entry bar: minimum scheme size of Rs. 100 crore, minimum investor commitment of Rs. 10 crore (Rs. 5 crore for accredited investors)
| Parameter | Category I AIF |
|---|---|
| Structure | Close-ended; minimum tenure 3 years |
| Minimum scheme corpus | Rs. 20 crore (Rs. 10 crore for Angel Funds) |
| Minimum investor commitment | Rs. 1 crore (Rs. 25 lakh for Angel Fund investors / manager employees & directors) |
| Sponsor/manager commitment | 2.5% of corpus or Rs. 5 crore, whichever is lower |
| Concentration limit | 25% of investable funds in one investee company (Regulation 15(1)(a)) |
| Leverage | Not permitted for investment; limited temporary borrowing only (≤30 days, ≤4 times a year, ≤10% of investable funds) |
| Taxation | Pass-through under Section 115UB / exempt at fund level under Section 10(23FBA) for non-business income |
Category II AIF — The Residual Powerhouse
Where the Bulk of Indian AIF Capital Sits Today
Category II is defined by exclusion: it captures any AIF that does not fall under Category I or III and does not employ leverage beyond meeting day-to-day operational requirements. That deliberately broad definition is exactly why it has become the largest AIF category in India by both number of registered funds and total AUM — private equity, private debt, venture debt, real estate and distressed-asset strategies almost all register here by default, because none of them require the specific incentives of Category I or the leverage of Category III.
Private Equity & Growth Capital Funds
Largest Sub-Segment by AUM
- Invests in unlisted equity of growth-stage and mature private companies, typically taking board representation and active governance rights
- Return generation relies on operational improvement, multiple expansion, and a defined exit — trade sale, secondary sale or IPO
Private Debt & Venture Debt Funds
Structured Yield
- Provides secured or structured debt, mezzanine financing, or venture debt to companies that need capital without further equity dilution
- Often layered alongside an existing equity investor's cap table rather than as the lead capital provider
Real Estate Funds
Direct & Structured Real Estate Exposure
- Invests directly in real estate assets, or in the equity and debt of real estate development and operating companies
- Illiquidity of the underlying asset class makes the close-ended, minimum 3-year structure a natural fit rather than a constraint
Fund of Funds (FoF) & Distressed Asset Funds
Diversification & Special Situations
- FoF structures invest into other AIF schemes rather than directly into companies, providing diversification across managers and strategies
- Distressed asset funds acquire stressed debt or equity outside the Category I Special Situation Fund route, most commonly for scaled institutional strategies
| Parameter | Category I AIF |
|---|---|
| Structure | Close-ended; minimum tenure 3 years |
| Minimum scheme corpus | Rs. 20 crore (Rs. 10 crore for Angel Funds) |
| Minimum investor commitment | Rs. 1 crore (Rs. 25 lakh for Angel Fund investors / manager employees & directors) |
| Sponsor/manager commitment | 2.5% of corpus or Rs. 5 crore, whichever is lower |
| Concentration limit | 25% of investable funds in one investee company (Regulation 15(1)(a)) |
| Leverage | Not permitted for investment; limited temporary borrowing only (≤30 days, ≤4 times a year, ≤10% of investable funds) |
| Taxation | Pass-through under Section 115UB / exempt at fund level under Section 10(23FBA) for non-business income |
Related-party exposure deserves a specific mention here: where a Category I or II AIF proposes to invest in an associate — a company connected to the sponsor, manager or their group — Regulation requires approval from at least 75% of investors by value before the investment can proceed. This comes up frequently in Category II real estate and private equity structures where the sponsor's group has adjacent operating businesses, and it is a governance point diligence teams check closely.
Structuring an AIF and Need the Valuation Work Sorted Early?
Portfolio company FMV under Rule 11UA, scheme NAV methodology, and Ind AS fair value marks all need to be right before your first drawdown — not fixed in retrospect during an investor audit.
Category III AIF — Active Strategies With Leverage
The Only Category Permitted Leverage and Open-Ended Structures
Category III is structurally the odd one out. It is the only category that may run either open-ended or close-ended, the only one permitted to use leverage for investment (not just operations), and the only one that loses pass-through taxation as a result. It exists for strategies that resemble hedge funds — long-short equity, market-neutral, arbitrage and quantitative approaches — where the value proposition is active portfolio management rather than patient, buy-and-hold capital.
Long-Only Category III Funds
Equity Exposure Without Net Short Positions
- Restricted by its own PPM to long positions in listed equity, with no net short derivative exposure
- A fund that neither borrows nor runs short positions carries a leverage ratio of 1x — economically similar to a PMS or mutual fund, but without their tax pass-through treatment, which is a trade-off worth interrogating before choosing this route
Long-Short & Market-Neutral Funds
Hedge-Fund-Style Active Management
- Takes simultaneous long and short positions through permitted derivatives; net exposure (long minus short) determines whether the fund is directional or market-neutral
- Leverage is commonly used within the regulatory ceiling to size positions beyond what unlevered NAV alone would allow
Arbitrage, Quant & PIPE Strategies
Section 115UB, Income Tax Act
- Exploits pricing inefficiencies across instruments, factors or time — cash-futures arbitrage, statistical arbitrage, and event-driven strategies
- PIPE (Private Investment in Public Equity) strategies combine features of private equity and public-market investing within the Category III wrapper
✔ The 2x NAV Leverage Ceiling, In Practice
- Total exposure — longs plus shorts, after permitted offsetting — cannot exceed two times the fund's NAV (SEBI circular CIR/IMD/DF/10/2013)
- A fund with Rs. 100 crore NAV can therefore hold aggregate positions worth up to Rs. 200 crore
- Leverage arising from borrowing, margin trading and derivative positions is all aggregated for this calculation
- Schemes using leverage must report exposure to SEBI on a monthly basis
| Parameter | Category III AIF |
|---|---|
| Structure | Open-ended or close-ended (close-ended: minimum 3-year tenure) |
| Minimum scheme corpus | Rs. 20 crore |
| Minimum investor commitment | Rs. 1 crore (Rs. 25 lakh for manager employees & directors) |
| Sponsor/manager commitment | 5% of corpus or Rs. 10 crore, whichever is lower |
| Concentration limit | 10% of investable funds or NAV for listed equity (Regulation 15(1)(b)); 20% for Large Value Funds |
| Leverage | Permitted up to 2x NAV (gross exposure after permitted offsets) |
| Taxation | No pass-through status; taxed at fund level based on legal form, commonly at the Maximum Marginal Rate for trust structures |
Category I vs Category II vs Category III — Full Comparison
Placed side by side, the three categories trade off in a fairly consistent pattern: the more regulatory latitude a category grants on leverage and structure, the less tax efficiency and the higher the sponsor's own capital commitment.
| Dimension | Category I | Category II | Category III |
|---|---|---|---|
| Primary purpose | Socially/economically desirable sectors | Residual — PE, debt, real estate, FoF | Complex/leveraged trading strategies |
| Typical investee | Unlisted start-ups, SMEs, infra, social ventures | Unlisted growth/mature companies, real estate, credit | Listed securities, derivatives, unlisted PIPE deals |
| Structure | Close-ended only | Close-ended only | Open or close-ended |
| Leverage | Not permitted | Not permitted | Up to 2x NAV |
| Concentration limit | 25% of investable funds | 25% of investable funds | 10% (20% for LVF) |
| Sponsor commitment | 2.5% / Rs. 5 crore, lower of the two | 2.5% / Rs. 5 crore, lower of the two | 5% / Rs. 10 crore, lower of the two |
| Taxation | Yes — sector-linked concessions | None specific | None specific |
| Best suited for | Patient, mission-aligned capital | Institutional PE/debt/real estate capital | Active, liquid, leverage-dependent strategies |
How Pass-Through Taxation Actually Works for Category I & II
Relative Value & Structured Situations
For most sponsors, the taxation gap between Category I/II and Category III ends up mattering more to net investor returns than any single investment restriction. Since Financial Year 2015-16, this has been governed by Section 115UB of the Income Tax Act, which was written specifically for SEBI-registered Category I and II AIFs.
📌 NRR Benchmarks and What They Signal
- Non-business income earned by the AIF — capital gains, interest, dividends — is exempt at the fund level under Section 10(23FBA)
- That same income is taxed directly in investors' hands under Section 115UB, retaining its original character — capital gains stay capital gains, interest stays interest
- Business income is the exception: it is taxed at the fund level first, and is then exempt in investors' hands under Section 10(23FBB) when distributed
- Losses at the fund level are not passed through to investors; they are carried forward at the AIF level to be set off against future income
- AIFs report income distribution to investors via Form 64C and to the tax department via Form 64D
Category III AIFs sit entirely outside this framework. They do not have pass-through status, so taxation follows the fund's legal form — trust, LLP or company — under general principles rather than the special AIF regime. For most privately pooled trust structures with indeterminate beneficiary shares, this typically means taxation at the Maximum Marginal Rate, which practitioners commonly quote at approximately 42.74% inclusive of surcharge and cess for the highest slab. A narrow set of specified funds — largely those operating out of India's International Financial Services Centre — do get targeted exemptions under provisions such as Sections 10(4D), 10(23FF) and 10(23FBC), but these do not apply to a typical domestic Category III scheme.
⚠️ TDS Mechanics Are Changing, Not Just the Numbering. Withholding on Category I/II pass-through distributions to unit holders is currently governed by Section 194LBB, generally at 10% for resident investors and at rates under Section 195 (subject to DTAA relief) for non-residents. Under the Income Tax Act, 2025, effective 1 April 2026, this provision is renumbered as Section 393(1); the underlying withholding mechanics are unchanged, but fund managers should update investor communication and Form 64C templates to reflect the new section reference.
The practical implication for a sponsor choosing between Category II and Category III for a credit or listed-market strategy is stark: identical gross returns can produce very different net-of-tax outcomes for investors, purely because of the wrapper. This is precisely why "we want leverage" is rarely, by itself, a sufficient reason to choose Category III — the tax cost of that leverage needs to be underwritten into the return target from day one.
Which Category Should You Choose? A Practical Decision Framework
Match the Category to the Strategy, Not the Other Way Around
You Want to Fund Start-Ups, SMEs or Infrastructure
Category I
If the strategy is genuinely early-stage, sector-specific, or aligned with government priority sectors, Category I is usually the only sensible fit — the sub-category structure (VCF, SME Fund, Infrastructure Fund, Social Venture Fund, Special Situation Fund) already maps closely to most start-up-adjacent mandates, and the regulatory concessions and pass-through tax treatment reward the illiquidity investors are accepting.
You Are Raising a Private Equity, Private Debt or Real Estate Fund
Category II
If the mandate does not fit neatly into a Category I sub-category and does not require leverage or an open-ended structure, Category II is almost always the default — it is the deepest, most institutionally familiar category, with the same tax pass-through as Category I and no sector restriction.
Your Strategy Requires Leverage, Derivatives, Short Positions, or Liquidity
Category III
If the return thesis genuinely depends on leverage, net short exposure, active trading, or the ability to offer investors periodic entry and exit through an open-ended structure, Category III is the only option — but underwrite the fund-level tax cost into the return model before committing, and confirm the strategy actually needs these features rather than merely being eligible for them.
You Want the Lightest Compliance Burden for a Small, Sophisticated Investor Base
Consider an AI-Only Fund or LVF, Within Any Category
If every investor other than the sponsor and manager will be an accredited investor, an Accredited Investors-only Fund or a Large Value Fund structure — available within Category I, II or III since the November 2025 reforms — removes several compliance layers without changing which category best fits the underlying strategy.
Weighing Category II vs Category III for a Credit or Structured Strategy?
We help sponsors model the after-tax investor outcome under each category before registration — so the leverage decision is made with the tax cost already priced in.
2025-2026 Regulatory Reforms That Affect Your Category Decision
The Rulebook Has Moved Substantially in the Last Twelve Months
SEBI has reshaped meaningful parts of the AIF framework since late 2025, and several of these changes directly affect the practical trade-offs between categories — sponsors evaluating structure today are working with a materially different rulebook than one from even two years ago.
1. Accredited Investors-Only Fund Categoryy
Notified via the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025 on 18 November 2025, this creates a lighter-touch scheme type — available within any of the three categories — where every investor other than the sponsor, manager and their employees or directors must be a SEBI-accredited investor. AI-only schemes are exempt from the pari-passu rights requirement and the 1,000-investor cap, and their key investment team is exempt from mandatory NISM certification.
2. Large Value Fund Threshold Cut From Rs. 70 Crore to Rs. 25 Crore
The same November 2025 amendment, operationalised by a SEBI circular dated 8 December 2025, lowers the minimum per-investor ticket for a Large Value Fund from Rs. 70 crore to Rs. 25 crore. This meaningfully widens the pool of domestic institutional and family-office investors who can access the lighter LVF compliance regime, within any AIF category.
3. Co-Investment Vehicles (CIVs)
Category I and II AIFs can now offer dedicated co-investment schemes alongside the main fund, allowing select investors to take a larger direct position in a specific portfolio company outside the pooled vehicle — a structure previously handled through informal side arrangements that carried more governance ambiguity.
4. Mandatory Dematerialisation of AIF Units
From April 2026, all AIF units across all three categories must be held in dematerialised form. Combined with NAV data now being reported directly to depositories, this allows AIF holdings to appear in investors' Consolidated Account Statements, simplifying estate transfers and portfolio reporting for HNI investors holding units across multiple schemes and categories.
5. The GARUDA Fast-Launch Mechanism
Following amendments notified on 14 July 2026 and an operational circular dated 30 July 2026, the Green-Channel: AIF Rollout Upon Document Acknowledgement (GARUDA) mechanism lets regular AIF schemes launch just 10 working days after the PPM is filed with SEBI through a merchant banker, unless SEBI directs otherwise. AI-only funds, Large Value Funds and Angel Funds go further — they can launch immediately on filing the PPM directly with SEBI, without a merchant banker, using a signed undertaking from the manager's CEO and Compliance Officer instead. This cuts scheme launch timelines meaningfully across all three categories, and makes lighter-regime structures even more attractive where the investor base qualifies.
📁 Anonymised Case Study
First-Time Fund Sponsor
Rs. 150 Cr Target Corpus
Dual Strategy Mandate
A first-time fund sponsor approached us wanting to raise a single AIF that would both back early-stage technology start-ups and run an opportunistic long-short strategy in listed mid-cap equity using the same pooled capital. On paper, the combined pitch was compelling to prospective investors — patient venture-style upside alongside tactical, liquid trading gains. Structurally, it was not possible: Category I prohibits leverage and is built around unlisted, illiquid holdings with a 3-year-plus close-ended tenure, while the listed long-short mandate required Category III's leverage and derivative rights, which Category I does not permit under any circumstances.
We restructured the raise into two separate AIFs under a common sponsor group: an Rs. 80 crore Category I Venture Capital Fund for the start-up mandate, and a Rs. 70 crore Category III long-short scheme for the trading strategy, launched under the GARUDA mechanism once the merchant banker's PPM filing was complete. The sponsor commitment obligation came out meaningfully different between the two — roughly Rs. 2 crore for the Category I scheme against the 2.5%/Rs. 5 crore cap, versus Rs. 3.5 crore for the Category III scheme under the steeper 5%/Rs. 10 crore requirement — a cash-planning difference the sponsor had not originally budgeted for. Modelling the after-tax investor return under Section 115UB pass-through for the Category I scheme, against fund-level MMR taxation for the Category III scheme, also reset return-target conversations with prospective investors before term sheets were issued, avoiding a renegotiation later in the process.
5 Common Mistakes When Choosing an AIF Category
❌ Choosing Category III purely to access leverage the strategy doesn't actually need
A long-only Category III fund that never borrows or shorts has the same 1x leverage ratio as a PMS or mutual fund — but pays fund-level tax instead of getting pass-through treatment.
Fix: Only choose Category III when the strategy genuinely requires leverage, derivatives, short exposure, or an open-ended structure — not for the category label alone.
❌ Assuming the category can be adjusted once fundraising has started
SEBI permits a change of category only before any investment has been made under the existing category, and requires investors be offered a penalty-free exit if funds have already been raised.
Fix: Finalise the category before drafting the PPM, not after the first close.
❌ Underestimating the sponsor commitment cash requirement, especially for Category III
The jump from 2.5%/Rs. 5 crore to 5%/Rs. 10 crore materially changes how much of the sponsor's own balance sheet needs to be committed before the fund can launch.
Fix:Model sponsor commitment cash flow against the fund's drawdown schedule before deciding on category and target corpus.
❌ Treating Category II as "no restrictions" because it lacks Category I's sector limits
Category II is still bound by the 25% concentration cap, the ban on leverage beyond operational needs, and the mandatory 3-year close-ended tenure — it is unrestricted only relative to Category I's sector focus, not in absolute terms.
Fix: Read Regulation 15 and the borrowing circular in full before assuming Category II offers more flexibility than it actually does.
❌Ignoring the 2025-2026 reforms that may now fit the investor base better
A fund raising exclusively from accredited investors or family offices may now be better served by an AI-only Fund or the lower Rs. 25 crore LVF threshold than by the standard scheme structure it would have defaulted to two years ago.
Fix: Re-check the AI-only Fund and LVF eligibility criteria against your actual investor pipeline before finalising the PPM structure.
Closing Summary: Match the Category to the Strategy, Not the Tax Outcome
Category I, II and III AIFs are not three flavours of the same product — they are three distinct regulatory regimes with different investable universes, leverage rights, sponsor commitment obligations and tax treatment, and SEBI does not make it easy to move between them once capital has been deployed. The right starting question is never "which category taxes us best," but "what does our investment strategy actually require" — patient unlisted capital points to Category I, institutional private equity or debt points to Category II, and leverage or liquidity points to Category III, with the tax and compliance consequences of that choice underwritten into the return model from day one. At Elite Valuation, we help sponsors work through this decision alongside the valuation, structuring and Rule 11UA compliance work that follows once the category is set — so the fund is built correctly the first time.
Choosing the Right AIF Category for Your Fund?
Strategy review → Category & sub-category selection → Sponsor commitment planning → Portfolio valuation and Rule 11UA compliance. One engagement, built for first-time and repeat fund sponsors alike.
Frequently Asked Questions — SaaS Valuation
CA Sagar Shah, Founder
Mr Sagar Shah is the Founder of Elite Valuation and leads the firm’s Valuation and Advisory practice. With over 15+ years of professional experience.
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