KYI: Know Your Investment

What are Category II AIF?

As per SEBI Regulations Category II AIF are AIFs which does not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. The government or the regulator does not offer any concessions or incentives for these funds. Private equity funds or debt funds are examples of Category II AIFs. This category comprises 80% AIFs and is the most popular among AIFs.

Source: SEBI

General Conditions for Category II AIFs

  • Category II AIF shall invest primarily in unlisted companies directly or through investments in units of other AIF
  • Allowed to invest in units of Category I AIF or in units of Category II AIF
  • May engage in activities such as hedging, including credit default swaps
  • Shall not borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements

Category II AIFs include

  • Private Equity (PE) Fund
  • Debt Fund
  • Structured credit funds
  • Fund of Funds
  • Private Real Estate Fund
  • Fund for Distressed Assets

Explore Investment Opportunities

Taxation of Category II AIF

When it comes to taxation, Category II 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 II 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 formet as Trust: Taxed at Maximum Marginal Rate*.

Disclaimer: However, it is advisable to consult your individual tax advisor and keep track of regulatory changes

Explore Other AIF Categories

AIF Category I

View Category Details

AIF Category III

View Category Details

Office No. 106A, B-Wing Kanakia Wall Street,
Andheri - Kurla Rd, Chakala, Andheri East,
Mumbai, Maharashtra - 400093

Quick Links