AIF (Alternative Investment Fund)
A SEBI-registered privately pooled fund. Most Indian VC firms are Category II AIFs. Investment from an AIF into a startup is tax-neutral for the company at the time of the round.
AIF (Alternative Investment Fund) is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. Unlike mutual funds, AIFs pool capital from a limited number of sophisticated investors and invest in a defined strategy — ranging from early-stage startups to real estate to hedge strategies.
Who it applies to
- Startups raising capital from VC funds structured as AIFs (the most common fundraising context)
- Fund managers registering an AIF with SEBI to pool investor capital
- Investors (HNIs, family offices, institutions) participating in an AIF with a minimum ₹1 crore commitment
Most founders interact with AIFs as portfolio companies — raising from a VC fund that is registered as an AIF — rather than as investors or fund managers.
The three categories
| Category | What it invests in | Relevance to startups |
|---|---|---|
| Category I | Startups, SMEs, social ventures, infrastructure | VC funds, angel funds — early-stage |
| Category II | Private equity, debt, fund of funds | Most mainstream VC firms in India |
| Category III | Hedge funds, complex trading strategies | Not relevant to startup fundraising |
SIDBI''s Fund of Funds for Startups primarily backs Category I and II AIFs that invest in Indian startups.
What you get
When a startup raises from an AIF:
- The investment is a primary share issuance — the company issues new shares to the AIF
- No tax on the company at the time of investment — angel tax was abolished from 1 April 2024, and primary issuances have always been tax-neutral for the issuing company
- The AIF appears on your cap table as a single shareholder (the fund vehicle), even though it pools money from many underlying investors
What most founders miss
Most Indian VC funds are Category II AIFs, not "Venture Capital Funds" in the technical SEBI sense (which is a Category I sub-category). The distinction matters when assessing whether a fund is eligible for SIDBI FFS backing — FFS specifically targets Category I and II AIFs with a domestic startup investment mandate, but not all Category II funds qualify.
An AIF is a regulated entity — it must file periodic reports with SEBI and is subject to investment restrictions. If a VC fund makes an offer that seems structurally unusual (e.g., no SEBI registration, no formal investment agreement), ask to verify the AIF registration number on the SEBI website.
Foreign investors who invest through a SEBI-registered AIF are treated as domestic investors for certain tax and regulatory purposes — this can simplify the compliance requirements compared to a direct foreign investment.
See also
- Angel Tax — abolished for new rounds; AIF investments are tax-neutral for the company
- SIDBI — manages the Fund of Funds for Startups that backs select AIFs
- Section 79 — loss carryforward rules relevant when an AIF-backed round changes ownership structure
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