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Investment Knowledge / Alternative Investments / AIF
Underpitch × Altport Funds · reviewed 8 September 2026

Alternative Investment Funds (AIF)

AIFs pool money from sophisticated investors and follow a defined private-market, credit, real-estate, venture, listed-market or alternative strategy. The important question is not “which AIF gave the best return?” but whether the category, liquidity, tax character, fees and risk fit your capital.

Standard minimum: ₹1 croreSEBI-regulatedCat I · Cat II · Cat IIITax can pass through
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What is an AIF?

An Alternative Investment Fund is a privately pooled investment vehicle. It raises capital from investors under a stated strategy and invests according to its Private Placement Memorandum (PPM).

Category IVenture capital, SME, infrastructure, social impact, special situations and other specified areas.
Category IICommonly private equity, private credit and other strategies that do not fall in Cat I or III.
Category IIIComplex or trading-oriented strategies, including permitted derivatives and leverage.
Core documentPPM: strategy, fees, risks, tenure, distributions and legal terms.

Who can invest?

Subject to the specific fund documents and applicable law, AIFs can accept eligible resident individuals, NRIs/OCIs, companies, LLPs, trusts, family offices, institutions and other permitted investors. Suitability matters: the regulatory minimum is not a signal that the product is low risk.

Minimum investment

The standard minimum investment in a regular domestic AIF is generally ₹1 crore per investor. Eligible employees/directors of the AIF or manager can have a lower ₹25 lakh threshold, and accredited-investor structures can have exceptions where the PPM and regulations permit.

Important: ₹1 crore is the regulatory entry threshold, not necessarily the amount called on day one. A close-ended AIF may take a commitment and draw it in multiple capital calls.

How to invest through Underpitch × Altport Funds

1Define the roleDecide whether the AIF is for private-market growth, income/private credit, diversification or a trading strategy.
2Compare fundsReview manager history, strategy, portfolio, liquidity, fees, drawdown structure and risk.
3Read the PPMConfirm tenure, hurdle, carry/performance fee, capital calls, valuation policy, default clauses and tax disclosure.
4KYC + subscribeComplete KYC, investor eligibility, agreements and banking, then fund the initial contribution/capital call.

Indian taxation — the simple version

Category I and Category II: Section 115UB generally gives pass-through treatment for non-business income. The income keeps its nature in the investor's hands as if the investor had earned it directly. Business income is treated differently and is generally taxed at the fund level.

Category III: it does not get the same specific statutory pass-through regime. Tax depends on the fund's legal structure and tax position, so the scheme tax memorandum must be checked.

Example 1 · pass-through interest₹10 lakh interest allocated to an investor already in a 30% slab

If the Category II AIF's income component is taxable interest passed through to the investor, the investor broadly pays slab-rate tax on that component.

Illustration: ₹10,00,000 × 30% = ₹3,00,000 + 4% cess = ₹3,12,000 (ignoring surcharge and other adjustments).
Example 2 · eligible listed-equity LTCG₹10 lakh qualifying long-term gain under section 112A

If the passed-through gain qualifies under section 112A and the investor has no other such gains in the year, the first ₹1.25 lakh of aggregate qualifying LTCG is outside the 12.5% charge.

Illustration: (₹10,00,000 − ₹1,25,000) × 12.5% = ₹1,09,375 + 4% cess = ₹1,13,750.
AIF tax is component-by-component. Interest, dividend, listed-equity gains, unlisted gains and business income can all behave differently. Never use one blanket “AIF tax rate”.

Risk and liquidity

  • Liquidity risk: Cat I and II AIFs are commonly close-ended and can hold assets that are difficult to sell. You may not be able to exit when you want.
  • Capital-call risk: you must be ready to meet committed capital when called. Missing a call can trigger penalties or other PPM consequences.
  • Manager risk: outcomes depend heavily on manager selection, deal access, portfolio construction and execution.
  • Valuation risk: private or unlisted assets do not always have a daily observable market price.
  • Concentration risk: some AIFs hold fewer, larger positions than a diversified mutual fund.
  • Leverage/derivative risk: more relevant to Category III; losses can be magnified.

Terms in plain English

Pass-throughThe fund does not turn every rupee into one generic income type. Eligible income is taxed in your hands with the same character it had inside the fund.
Capital callA request from the fund to pay part of the amount you committed earlier.
Hurdle rateA return threshold that may need to be crossed before a performance fee/carry is charged, depending on the PPM.
Carry / performance feeA share of profits paid to the manager after the rules in the PPM are met.
LeverageBorrowing or derivatives that create exposure larger than the cash capital. It can magnify wins and losses.
IndexationAn inflation adjustment to purchase cost. It has been removed for most long-term transfers after 23 July 2024, subject to limited exceptions.

Sources & verification

SEBI — AIF Regulations, amended July 2026 ↗SEBI — AIF Master Circular, June 2026 ↗Income Tax Department — Section 115UB ↗Altport Funds — current AIF minimum guide ↗

Educational information only, not a personalised investment, tax or legal recommendation. AIFs can involve substantial risk, illiquidity and loss of capital. The current PPM, contribution agreement, tax memorandum and investor circumstances prevail over this summary.