Introduction

India provides a comprehensive regulatory architecture for domestic and overseas fund managers seeking to establish investment funds. The framework accommodates a range of strategies, investor profiles and domicile considerations, with two principal regulatory regimes operating in parallel.

Domestic investment funds are regulated by the Securities and Exchange Board of India (SEBI) and include privately placed alternative investment funds (Domestic AIF), governed by the SEBI (Alternative Investment Funds) Regulations 2012 (the AIF Regulations), and retail mutual funds, governed by the SEBI (Mutual Funds) Regulations 2026 (the MF Regulations), which replaced the SEBI (Mutual Funds) Regulations 1996 with effect from 1 April 2026. Portfolio management services (PMS) are regulated through by the SEBI (Portfolio Managers) Regulations 2020 (the PMS Regulations), which are scheduled to be replaced with the SEBI (Mutual Funds) Regulations 1996 with effect from 1 April 2027. SEBI also regulates investment advisors and research analysts through separate regulations for such activities.

India set up its first International Financial Services Centre (IFSC) in at Gujarat International Finance Tec-City (GIFT City) in Gandhinagar, Gujarat. Financial services activities conducted in GIFT City are regulated by the uniform single regulator, International Financial Services Centres Authority (IFSCA). GIFT City is regarded as “foreign territory” for Indian exchange control purposes. Like SEBI, IFSCA to regulates asset management activities through various regulations including International Financial Services Centres Authority (Fund Management) Regulations 2025 (the FM Regulations) and IFSCA (Capital Market Intermediaries) Regulations 2025 (the CMI Regulations).

Fund managers proposing to establish India-focused funds must evaluate whether a SEBI AIF or a GIFT City Fund is more suitable, considering the investor base, the proposed investment strategy and applicable legal, regulatory and tax considerations. GIFT City Funds are treated as non-residents under India’s foreign exchange laws and can take exposure to Indian securities through the applicable foreign investment routes, such as foreign direct investment (FDI) or foreign portfolio investment (FPI). Offshore investors can invest in a SEBI AIF under the automatic route, meaning there is no approval required under exchange control regulations. Hence, a SEBI AIF can seamlessly pool capital from resident Indians as well as offshore investors including feeder funds set up in offshore jurisdictions such as Singapore, Mauritius or GIFT City.

Fund structures, in the alternative investments industry, vary depending on legal, regulatory, tax and commercial considerations. However, broadly they can be classified into two structures: unified (or fund in fund) structure and parallel (or co-investment) structure. Fund structure could also be combination of multiple vehicles and services such as a mutual fund asset management company (AMCs) also managing AIFs) or an AIF manager also providing portfolio management services or advisory services to its onshore or offshore clients.

The asset management industry has grown in leaps and bounds in the past decade in India. It has been witness to consolidation and acquisitions at the manager and/or funds levels. AMCs and AIF managers have also gone public and raised funds from the public to fuel their growth trajectory. Gaja Alternative Asset Management Limited (operating as Gaja Capital) completed its initial public offering in August 2026, becoming India’s first publicly listed pure-play alternative asset management company. Recently, in September 2026, Fairfax announced acquiring control over IIFL Capital Services Limited (IIFL Capital) through a series of transaction including an open offer. IIFL Capital is one of the leading financial services companies offering broking services, wealth management, financial products distribution, institutional broking, research and investment banking services.

Year in review

Overview

The period under review saw significant regulatory activity across the frameworks governing SEBI AIFs, mutual funds and fund management entities (FMEs) operating in GIFT City. SEBI introduced measures concerning accredited investors (AI), including the new accredited investor-only fund (AI-only Fund) framework and relaxations applicable to large-value funds (LVFs), while also prescribing a new certification requirement for compliance officers of AIF managers. Separately, SEBI introduced a fast-track launch mechanism for certain AIF categories and issued a comprehensive Master Circular for AIFs in June 2026. On the other hand, IFSCA proposed and implemented amendments to the fund management framework, including a co-investment framework, stewardship code, governance and fiduciary segregation requirements, website transparency mandate for FMEs and a framework for differential distribution rights enabling blended finance structures. Developments in foreign investment and reporting requirements also raised issues relevant to fund structures and entities operating from GIFT City.

Key developments

AI-only Funds and relaxation of LVF norms

The AIF Regulations now provide a separate framework for AI-only Funds, with the existing LVF framework subsumed within this broader category.[1] An AI-only Fund is an AIF or scheme of an AIF in which all investors are AIs, subject to specified exceptions for the manager, sponsor and employees and directors of the AIF or its manager. The framework recognises that sophisticated investors can evaluate risks without the same regulatory guardrails required for the broader investor base, permitting managers to structure more flexible terms for institutional capital.

Key relaxations include: (1) flexibility to offer differential rights to investors (such as preferential economics or enhanced information rights); (2) extension of tenure of the fund by up to five years (compared with two years for other (general category) AIFs); (3) exemption from the requirement for at least one key personnel of the manager to obtain the prescribed NISM certification;[2] and (4) the ability for managers to discharge certain trustee obligations subject to the terms of the relevant agreement.

The minimum investor commitment by AIs for LVFs has been reduced from 700 million rupees to 250 million rupees, lowering the threshold for participation by domestic and global financial institutions and making LVFs accessible to a wider pool of institutional investors. LVFs also benefit from streamlined waiver processes, they are no longer required to obtain specific investor waivers to avail themselves of exemptions from the standard PPM template requirements, the annual PPM audit or the investment committee’s liability in relation to compliance with prescribed policies. Existing AIF schemes comprising only AIs may migrate to the AI-only Fund or LVF framework with investor consent, without requiring investors to re-establish their accredited status. The SEBI AIF Regulations also permit conversion of non-LVFs into LVFs through investor and SEBI consent.

GARUDA framework

In June 2026, SEBI approved a new pathway for launching AIF schemes called the Green-Channel: AIF Rollout Upon Document Acknowledgement (GARUDA). This pathway enables managers to launch schemes faster, with significantly reduced documentation requirements between filing and the commencement of fundraising, while preserving SEBI’s ability to intervene where concerns arise. GARUDA represents the second phase of SEBI’s evolving approach to PPM review, following the Fast-Track Mechanism.[3] Under the fast-track mechanism, funds (other than LVFs) could be launched on completion of 30 days after filing, unless queries are raised by SEBI on the application. GARUDA further reduces this timeline: standard schemes (schemes that are not AI-only Funds, LVFs or Angel Funds) may now launch within 10 working days of filing (still through a merchant banker), while AI-only Funds and Angel Funds may launch immediately upon registration or filing, with the merchant banker requirement has been replaced by an undertaking from the manager’s chief executive officer and compliance officer. SEBI will continue to examine scheme documents post-launch on a risk-based sample, and the manager and the merchant banker (if applicable) bears full responsibility for the accuracy and completeness of PPM disclosures. The framework reflects a calibrated approach to regulation based on investor sophistication, the more experienced the investor base, the lesser the regulatory oversight required by SEBI at the pre-launch stage.

IFSCA has adopted a comparable approach. Venture Capital Schemes and Restricted Schemes are filed under a “green channel” and are open for subscription immediately once IFSCA communicates that the placement memorandum has been taken on record, with IFSCA retaining the ability to offer comments at any stage. Scheme applications are now filed through the IFSCA Single Window IT System.

Inoperative fund framework

Several AIFs complete their investment activity but are unable to wind up on account of pending or threatened litigations or tax demands. Under the prior framework, such funds were required to maintain full compliance obligations even when effectively dormant. The inoperative fund framework, introduced under the AIF Regulations, addresses this limitation by permitting SEBI AIFs to surrender their registration while retaining amounts for specified purposes including pending tax demands or litigation, anticipated liabilities and residual operational expenses (subject to a cap of three years for the expenses). Such AIFs will be designated as inoperative and thus would be eligible for reduced compliance requirements, including exemptions from filing PPM audit reports, compliance test reports and quarterly reports to SEBI, although annual reporting obligations continue. To ensure this regulatory leeway is not abused, inoperative funds are restricted from launching new schemes or charging management fees. Further, retained funds/reserves can only be invested in permitted temporary investments.[4]

Press Note 2 of 2026: relaxation of FDI approval requirements

Press Note 3 of 2020 (PN3) requires prior government approval for investments into India by entities situated in countries sharing a land border with India (LBC),[5] or where beneficial ownership is situated in a LBC. Many global funds have passive investors with indirect LBC exposure through multi-layered LP structures, and the prior approval framework required tracing of such connections and receipt of PN3 approval could significantly impact transaction closing timelines for onshore AIFs as well as global PE funds. Press Note 2 of 2026 (PN2) was issued by the Government of India addressing the practical challenges and delays associated with obtaining PN3 approvals.[6] PN2 introduces a safe harbour, viz. investments involving non-controlling beneficial ownership of less than 10% in LBCs are now exempt from the approval requirement. The amendments also introduce relaxations for investments by non-resident Indians situated in LBCs and expedite approval timelines for investments in specified sectors. Thus, PN2 aims at significantly reducing the compliance burden for inbound investments involving limited LBC exposure while maintaining safeguards for sensitive sectors.

On a related note, SEBI through the relevant regulations such as AIF Regulations and FPI regulations has notified enhanced due diligence and reporting requirements for capital raised in these vehicles from LBC investors.

RBI FLA reporting and GIFT City entities

The GIFT City operates under a distinct regulatory framework administered by IFSCA and GIFT entities are treated as non-residents under India’s foreign exchange laws. Hence, they are not subject to domestic reporting requirements like the Annual Return on Foreign Liabilities and Assets (FLA). The updated FAQs dated 25 March 2026 on FLA reporting (Updated RBI FAQs) issued by the Reserve Bank of India (RBI) appear to extend the FLA filing requirement to entities registered with the IFSCA and operating from GIFT City.^[7] This creates a potential conflict as it dilutes the foreign territory status of GIFT City. IFSCA issued a circular dated 1 May 2026 clarifying that the implications of the Updated RBI FAQs were under discussion with the RBI and advising IFSC entities to refrain from taking any action based on the Updated RBI FAQs pending further regulatory guidance.[8]

IFSCA developments

IFSCA continued to develop the GIFT City fund management framework with reforms strengthening its proposition as a leading fund-management jurisdiction. GIFT City has had a steady rise in global financial centre rankings, from 46th in Global Financial Centres Index (GFCI) 39 to 37th globally in the latest GFCI as on September 2026.[9] Positioned alongside established hubs like Singapore and Dubai, GIFT City has differentiated itself as a leading destination driven by attractive tax incentives, regulatory certainty and ease of establishment.

IFSCA’s fund management ecosystem in GIFT City continued to expand, with 235 registered FMEs operating 401 schemes and 16,150 investors as at 30 June 2026. Non-retail schemes had cumulative commitments of US$45.08 billion, cumulative funds raised of US$22.93 billion and cumulative investments of US$21.05 billion. Category I and II AIF accounted for US$13.69 billion of funds raised, while category III AIFs accounted for US$9.11 billion and venture capital accounted for US$127.37 million. Of the investments made by non-retail schemes, US$17.87 billion was invested in India and US$1.64 billion in foreign jurisdictions, reflecting GIFT City’s role in connecting domestic investment opportunities with global capital flows.[10]

Key developments for the year under review included: (1) the co-investment framework, introducing the Special Scheme structure that permits FMEs to establish a co-investment SPV for deal-specific capital alongside the main fund;[11] (2) the stewardship code requiring managers to engage actively with investee companies on governance and strategy;[12] (3) the governance and fiduciary segregation requirements, mandating clearer separation between the FME’s governance functions and its fiduciary responsibilities to address potential conflicts of interest in the multi-scheme FME model;[13] (4) the CMI Regulations providing a unified registration framework for custodians, distributors and other capital market intermediaries operating in GIFT City, with certification requirements and reporting norms; (5) the website transparency mandate, requiring every Registered FME (Non-Retail) to maintain a publicly accessible website or dedicated webpage prominently displaying specified information including the FME’s profile, registration details, schemes managed, particulars of key service providers and grievance redressal mechanisms;[14] and (6) the framework to support blended finance structures through use of differential waterfall across senior, mezzanine and junior / subordinate units to accommodate investors with differing risk-return profiles and thereby attract private capital at scale for development and growth purposes.[15]

Through a draft bill, IFSCA seeks to provide legal recognition and regulatory certainty for VCCs as fund vehicles in IFSCs. It is expected to enhance IFSC’s appeal to global investors by offering a flexible, internationally aligned structure, with ring-fencing of sub-fund assets and liabilities and a variable-capital mechanism that may offer greater structural flexibility than the traditional trust-based fund structure.

Regulatory framework

SEBI AIFs are governed by the AIF Regulations and GIFT City Funds by the FM Regulations. For Cross border fund structures there will be an interplay with the Indian exchange control framework mainly the Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations issued thereunder, including the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (the NDI Rules), administered by the RBI.

SEBI AIFs are classified as Category I, Category II or Category III, based on their investment strategy and the nature of their investments. Category I AIFs invest in specified sectors considered socially or economically desirable, including start-ups, early-stage ventures, social ventures, small and medium enterprises and infrastructure. Category II AIFs invest primarily in securities of unlisted companies, credit funds are set up under this category. Category III AIFs may invest in listed or unlisted securities, derivatives, and complex or structured products.[16] Total commitments to AIFs stood at just 14,371.8 million rupees at the end of March 2013, the first year after the AIF Regulations came into force. By 30 June 2026, cumulative commitments raised by AIFs registered with SEBI had increased to 17,530.70 billion rupees. Category I AIFs accounted for 1,130.41 billion rupees, Category II AIFs for 13,028.37 billion rupees and Category III AIFs for 3,371.92 billion rupees. Category II AIFs continued to account for the largest share of total commitments raised, representing approximately 74.3% of the total.[17]

The AIF Regulations prescribe investment concentration limits. Category I and Category II AIFs cannot invest more than 25% of their investable funds in a single portfolio entity, whether directly or through investment in units of other AIFs, with the corresponding limit for Category III being 10%. Higher limits of 50% and 20% for respective category apply to LVFs. For Category III AIFs investing in listed equity, SEBI permits the concentration limit to be calculated by reference to either the fund’s investable funds or its NAV. AIFs require prior SEBI approval to make overseas investments, which cannot exceed 25% of its investable funds and is also subject to the overall aggregate limits applicable to the AIF industry. Category I and Category II AIFs are closed end with a minimum tenure of three years, extendable by two years (or up to five years for LVFs and AI-only Funds) with investor consent. Category III AIFs may be open ended or closed end. The minimum investment per investor is 10 million rupees, subject to no threshold for Accredited Investors in non-LVFs and AI-only Funds. For LVFs, the minimum investor commitment is 250 million rupees. The AIF Regulations also require the appointment of custodian by each AIF for the safekeeping and protection of securities, as applicable, and the manager must ensure separation of assets and liabilities and maintain segregated and ring-fenced bank and securities accounts for each scheme managed by it.

Funds in GIFT City operate under the FM Regulations and include Venture Capital Schemes (minimum corpus US$3 million, up to US$200 million, maximum 50 investors, minimum investment generally exceeding US$250,000), Restricted Schemes (minimum corpus US$3 million, up to 1,000 investors, minimum investment commitment exceeding US$150,000) and Retail Schemes (minimum corpus US$3 million, minimum 20 investors, with no single investor holding more than 25% of the scheme). Restricted Schemes encompass Category I, Category II and Category III AIFs. For Retail Schemes investing 15% or more of their assets in unlisted securities, the minimum commitment is US$10,000 per investor; no minimum investment applies to open-ended schemes or closed-ended schemes investing less than 15% in unlisted securities. Accredited Investors are exempt from minimum investment requirements for Venture Capital Schemes and Restricted Schemes. Unlike SEBI AIFs, the AIFs in GIFT City are not subject to general investment concentration norms, although specific investment conditions and restrictions apply to each scheme category.

Service providers to SEBI AIFs, including custodians, merchant bankers, registrars and share-transfer agents, are required to be SEBI-registered and have a presence in India, subject to applicable exceptions. Certain local service providers, including trustees and benchmarking agencies, may not require SEBI registration to provide services to the AIFs. The manager of a SEBI AIF must be incorporated in India in accordance with applicable Indian laws, and foreign investment in the manager is permitted up to 100% under the NDI Rules through the automatic route (ie, no government approval required) subject to any PN3/PN2 considerations. Where ownership or control of both the manager and sponsor do not lie with Indian resident citizens, investments made by the SEBI AIF in equity instruments of an Indian entity may be treated as “indirect foreign investment” and thus be subject to applicable sectoral caps, pricing guidelines and other conditions under the NDI Rules. Service providers in GIFT City, including custodians, investment bankers, investment advisers, research entities, broker dealers, credit rating agencies, distributors and depository participants etc. are regulated through the CMI Regulations.

SEBI has developed the SEBI Intermediary Portal for relevant registration and post-registration activities under the AIF Regulations. SEBI also operates an informal guidance scheme through which investors, market intermediaries and other entities may seek guidance on regulatory matters, subject to payment of the applicable fee. Pre consultation meetings are also typically done with SEBI officials to obtain clarity on applicability of any provision for a proposed structure and/or for obtaining any other clarity before filing the application under relevant regulations. IFSCA has adopted a similar approach to regulatory engagement, and meetings with IFSCA officials are often welcome with both the development and regulatory team providing guidance to prospective fund managers and investors.

Common asset management structures

India’s asset management market comprises a range of pooled and separately managed investment structures. The appropriate structure depends principally on the investor base, investment strategy, regulatory requirements, tax implications and commercials considerations. SEBI AIFs are commonly established as private trusts, although the AIF Regulations also permit an AIF to be constituted as a company or limited liability partnership (LLP). The trust structure remains popular on account of ease of set up and winding up.

Mutual funds operate through a separate regulatory architecture. The MF Regulations replaced the earlier 1996 regulations with effect from 1 April 2026. Mutual funds are constituted as trusts, with a sponsor establishing the mutual fund and appointing trustees, while an AMC undertakes the management of the schemes. The 2026 framework rationalises the regulatory structure and strengthens governance while reducing certain compliance requirements.[18]

PMS provide a model under which client portfolios are managed on an individual rather than pooled basis. This structure is relevant for investors seeking separately managed accounts and greater portfolio-level customisation.

GIFT City provides an additional fund management platform through the IFSC. GIFT City funds are established and managed by an FME regulated by IFSCA under the FM Regulations and, like SEBI AIFs, may be constituted as a trust, company or LLP under the applicable laws of India. The framework provides for Venture Capital Schemes, Restricted Schemes (Category I, II and III) and Retail Schemes, and FMEs may launch a range of strategies, including private equity, debt, hedge and long-only funds, ESG funds, special situation funds, exchange traded funds, real estate investment trusts (REITs) and InvITs. IFSCA has also introduced a Special Scheme framework facilitating co-investment by Venture Capital Schemes and Restricted Schemes through a special-purpose vehicle.

Main sources of investment

India’s alternative investment sector has expanded materially in recent years. As of 30 June 2026, domestic AIFs had raised approximately 17.5 trillion rupees in cumulative commitments, while non-retail funds in GIFT City had raised approximately US$45.1 billion.[19] The growth has been accompanied by regulatory initiatives by both SEBI and IFSCA intended to facilitate the development of the domestic and IFSC fund-management markets.

AIFs raise capital from Indian institutional investors, family offices, high-net-worth individuals and AIs, as well as foreign investors investing directly or through intermediate jurisdictions where feeder funds are set up such as Singapore, Mauritius, Luxembourg, or GIFT City. The investor base may vary by strategy and category. Foreign capital remains an important source of investment for India-focused private funds investing in infrastructure and real estate sectors. The Government of India set up, and committed 300,000 million rupees to, its first quasi sovereign fund called National Investment and Infrastructure Fund as a Category II AIF for making investments in infrastructure, manufacturing and other sectors of national importance. The government has an additional commitment of 300,000 million rupees for the successor fund.

Mutual funds have a substantially broader investor base and are principally supported by retail investors alongside institutional investors who invest into Indian mutual funds under the FPI route.

Insurance companies, pension funds, banks and other regulated entities are subject to sector-specific investment restrictions when investing in AIFs. The RBI’s revised framework governing investments by regulated entities in AIFs has introduced additional requirements and restrictions for banks and non-banking financial companies (NBFCs) has adversely impacted large scale participation by regulated entities in AIFs. Hence, managers must pay careful attention needs to be given to the sectoral restrictions as well as offshore placement restrictions for fund raising to be successful.[20]

Sectoral regulation

Insurance

Insurance companies investing in asset management products are subject to the investment framework prescribed by the Insurance Regulatory and Development Authority of India (IRDAI). The regulatory framework governs the manner in which insurers may deploy policyholder and shareholder funds and prescribes prudential requirements applicable to investments. Insurance capital participating in AIFs and other alternative investment structures is subject to both the requirements applicable to the relevant fund and the investment restrictions applicable to the insurer.[21] IRDAI permits investment in AIF subject to single-AIF exposure limits of the lower of 10% of the AIF’s size or 20% of the insurer’s overall exposure. IRDAI’s circular dated 12 February 2026 clarifies that insurers may invest in AIFs with overseas exposure, subject to SEBI-compliant excusal rights and safeguards ensuring that insurers’ capital is not deployed towards overseas investments.

Pensions

Pension funds and pension fund managers are regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Pension-sector investment is subject to prescribed asset-allocation and prudential requirements. The role of pension capital in alternative investments has increased as the Indian alternatives market has expanded, although the ability of pension funds to invest in particular AIF strategies remains subject to the applicable investment framework.[22]

PFRDA guidelines permit pension funds to invest in Category I and Category II AIFs having a minimum corpus of 1,000 million rupees, with exposure to any single AIF capped at 10% of that AIF’s size. The National Pension System Trust has established the NPS Bharat FoF to channel pension capital into eligible AIFs, reports have estimated potential AIF investments of up to 170,000 million rupees, based on a 1% allocation against the NPS’s reported assets under management.[23]

Real property

Investment in real estate sector opportunities is possible through a number of regulated structures, including real estate funds set up as Category II AIFs, REITs, and debt opportunities through FPI route. REITs are regulated under the SEBI (Real Estate Investment Trusts) Regulations 2014, which require a minimum asset value of 5 billion rupees, at least 80% investment in completed and revenue-generating properties, and listing on a recognised stock exchange in India. REITs must distribute at least 90% of net distributable cash flows to unit holders. Category II AIFs investing in real estate may invest in equity or debt across the development cycle, including under-construction projects and in some situations even projects at land aggregation stage.[24]

The increasing institutionalisation of India’s real estate market has resulted in greater participation by offshore investors and AIFs. The use of AIF structures allows investors to obtain exposure to real estate strategies without adopting the listed REIT structure, although the resulting liquidity, valuation and governance considerations differ.

Hedge funds

Hedge fund strategies in India are generally undertaken through Category III AIFs set up under AIF Regulations or through GIFT City, which are permitted to employ diverse or complex trading strategies and may employ leverage, subject to the requirements under the Regulations and applicable circulars. For SEBI Category III AIFs the leverage ratio is limited to two times the fund’s NAV. The structure provides greater flexibility for strategies involving listed securities, derivatives and other trading activities.[25]

Private equity

Private equity is principally conducted through Category II AIFs, which have become an important vehicle for institutional and sophisticated investment into Indian companies. Category II AIFs are commonly used for growth capital, buyouts, venture capital, private credit and special situations strategies.

Private equity funds are increasingly using co-investment structures, which provide fund managers with greater flexibility to accommodate deal-specific capital requirements while retaining the regulatory framework applicable to the underlying fund when accessing larger deal size or raising more capital to acquire controlling stake.

Governance and conflicts of interest have emerged as important areas of regulatory focus. Investor-consent requirements and the treatment of conflicted transactions were addressed in SEBI’s June 2026 consultation paper, which proposed changes including a proposed move from the narrower concept of an “associate” towards a broader “related party” concept.[26] The proposals are intended to streamline investor-consent processes while strengthening oversight of conflicted transactions. Lifecycle issues for funds retaining proceeds beyond their permissible fund life have separately been addressed by the inoperative fund framework introduced in April 2026.

Tax law

The Income-tax Act, 2025 (IT Act 2025) replaced the Income-tax Act, 1961 with effect from 1 April 2026.[27] The Income-tax Rules, 2026 were published on 20 March 2026 and are effective from the same date. The IT Act 2025 and the rules thereunder govern the tax treatment of SEBI AIFs and GIFT City funds.

SEBI AIFs

Category I and Category II SEBI AIFs benefit from tax pass-through treatment. Income is taxable directly in the hands of investors as if they had invested directly in the underlying securities. This pass-through treatment applies to income other than income under the head “Profits and gains of business or profession”. Business income is taxable at the maximum marginal rate applicable for the relevant financial year at the AIF level and is thereafter exempt from tax in the hands of investors.[28]

Category III SEBI AIFs do not receive the same statutory pass-through treatment. However, when structured as trusts, they may enjoy tax transparency as per general principles of trust taxation and other applicable provisions of the IT Act 2025.

Non-resident investors are entitled to claim benefits under an applicable double-taxation avoidance agreement (Tax Treaty) between their country of residence and India. Where more beneficial, the Tax Treaty provisions supersede domestic tax provisions subject to applicable requirements and customary substance conditions.

GIFT funds

GIFT funds in the nature of Category I and Category II AIFs have been accorded tax pass-through treatment similar to that applicable to SEBI AIFs. Business income qualify for a 100% tax holiday for twenty years within the first 25 years. Non-resident investors are exempt from tax on offshore income earned through GIFT funds and are not required to obtain a Permanent Account Number (PAN) or file an Indian tax return.[29] Losses other than business losses may be passed through to unit holders, subject to the applicable conditions. Such losses are ignored for pass-through purposes where they arise in respect of units that the unit holder has not held for at least 12 months.[30]

Category III AIFs set up in GIFT City are taxed at fund level, subject to exemptions for non-resident investors on income arising from the transfer of specified securities. They are also entitled to lower withholding tax rate on interest income.

FMEs also benefit from a 100% corporate tax holiday for 20 years within the first 25 years, reduced minimum alternate tax or alternate minimum tax rates and GST exemption on services provided to GIFT funds.

Special considerations

AIFs can raise funds only through private placement and after obtaining regulatory approval. Managers are not permitted to publicly advertise offers to subscribe for units of an AIF. Pre-marketing is not expressly recognised under the AIF Regulations or the FM Regulations. Appropriate disclaimers must be incorporated into marketing pitchbooks and presentations. Managers should carefully structure pre-marketing communications to avoid characterisation as an offer or invitation to subscribe, particularly when engaging with prospective investors across multiple jurisdictions with varying regulatory thresholds or placement norms. Distributors seeking to establish operations in GIFT City and facilitate investments or subscriptions in GIFT funds, Indian funds or funds established in other jurisdictions must register with IFSCA under the CMI Regulations before commencing operations and must ensure ongoing compliance with the IFSCA-prescribed Code of Conduct when distributing GIFT funds.

Distribution and placement fees are regulated under the AIF Regulations. For Category III AIFs, distribution or placement fees must be charged to investors on an equal-trail basis, without upfront fees, and paid solely from the management fee received. For Category I and Category II AIFs, up to one-third of the total distribution or placement fee may be paid upfront, with the balance payable on an equal-trail basis over the fund’s tenure.

AIFs and their managers are required to adopt various policies under AIF Regulations and FM Regulations including addressing risk management, cyber security, valuation, anti-money laundering and counter-terrorist financing (AML/CFT), stewardship code, outsourcing policy, conflict of interest policy, to name a few. Valuations of unlisted and thinly traded securities are based on the International Private Equity and Venture Capital Valuation Guidelines. The SEBI (Prohibition of Insider Trading) Regulations 2015 require managers to formulate a code of conduct to regulate, monitor and report trading by designated persons and their immediate relatives, as applicable to the relevant AIF. The AML/CFT policies address client due diligence, investor-risk categorisation, transaction monitoring and reporting of suspicious transactions to the Financial Intelligence Unit India.

Category I and Category II AIFs may borrow to cover a drawdown shortfall for an investment. The amount borrowed cannot exceed the lowest of: (1) 20% of the proposed investment in the investee company; (2) 10% of the AIF’s investable funds; or (3) the pending commitment from investors. Borrowing for day-to-day operational requirements is subject to separate restrictions and may not exceed 30 days, may be undertaken on no more than four occasions in a year, and may not represent more than 10% of the AIF’s investable funds. Category III AIFs may borrow or use leverage, including through derivatives, borrowing or other means, subject to SEBI’s prudential requirements and a leverage ratio limit of twice the fund’s NAV. Venture Capital Schemes and Restricted Schemes in GIFT City may undertake borrowings without a prescribed general limit, subject to investor consent and appropriate disclosure in the placement memorandum, with any change to the relevant terms requiring the consent of two-thirds of investors by value. Retail Schemes may borrow up to 20% of their assets under management for a period of up to six months, solely to meet temporary liquidity requirements for redemptions. Restricted Schemes may also undertake short selling, subject to applicable leverage limitations.

Each SEBI AIF manager must designate a staff member to address investor grievances. Where an investor remains dissatisfied with the response or resolution provided by the AIF, the investor may file a complaint through SEBI’s SCORES platform. Investors may also use the Online Dispute Resolution platform established to facilitate online conciliation and arbitration for disputes in the Indian securities market. Investor approval at specified thresholds is required for certain decisions, including in-specie distributions, early winding-up, extension of tenure, transactions with associates and changes to investment strategy.

Outlook and conclusions

India’s asset management industry continues to evolve against a regional backdrop in which established fund-management centres have achieved considerable scale. Singapore and Hong Kong reported AUM of approximately US$5.2 trillion[31] and US$5.42 trillion[32], respectively, in 2025. India’s fund-management industry, while smaller in absolute terms, is growing steadily, as at 30 September 2026, the Indian mutual fund industry had AUM of approximately US$925 billion[33]. Cumulative commitments raised by AIFs increased from 14.37 billion rupees at the end of March 2013, the first year after the AIF Regulations came into force, to approximately 17.53 trillion rupees as at 30 June 2026, representing approximately 1,220 times their initial level. GIFT City is also emerging as an international fund-management centre, with non-retail schemes recording cumulative commitments of US$45.08 billion, funds raised of US$22.93 billion and investments made of US$21.05 billion as at 30 June 2026.[34] These figures underpin the huge potential for growth for the Indian asset management industry, both mainland as well as GIFT City.

Looking ahead, the Indian asset management framework is positioned for continued growth, supported by regulatory initiatives that seek to balance market development with appropriate investor protection and governance standards. The trend towards greater structural flexibility, differentiated regulation and international competitiveness through GIFT City is expected to continue, providing fund managers with an increasingly sophisticated range of options for establishing and managing investment vehicles for Indian and offshore investors.

[1]SEBI (Alternative Investment Funds) (Second Amendment) Regulations 2025, notified on 18 November 2025.

[2] NISM means the National Institute of Securities Markets. Regulation 4(g)(i) of the AIF regulations requires at least one key personnel to hold a relevant certification specified by SEBI.

[3] SEBI Circular No. HO/19/19/11(2)2026-AFD-RAC2/I/10624/2026 dated 30 April 2026, Fast-Track Mechanism; SEBI Circular No. HO/19/19/11(2)2026-AFD-RAC2/I/17617/2026 dated 30 July 2026, GARUDA.

[4]AIF Regulations, Regulation 29(10A); SEBI Circular No. HO/19/34/11(2)2026-AFD-POD1/I/13764/2026 dated 16 June 2026; SEBI Master Circular for AIFs dated 7 September 2026, Chapter 25.

[5]LBCs are: China (including Hong Kong), Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan.

[6]Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, Press Note No. 2 (2026 Series) dated 15 March 2026.

[7]RBI, Updated FAQs on Annual Return on Foreign Liabilities and Assets dated 25 March 2026.

[8]IFSCA Circular dated 1 May 2026, addressed to financial institutions operating in the IFSC.

[9] Z/Yen Group and China Development Institute, The Global Financial Centres Index 40, September 2026, https://www.longfinance.net/programmes/financial-centre-futures/global-financial-centres-index/.

[10] IFSCA, IFSCA Bulletin, Q1 FY 2026–27 (April–June 2026).

[11] IFSCA Circular F. No. 57/IFSCA/FM/2025-26 dated 19 May 2025, Framework to facilitate Co-investment by Venture Capital Scheme and Restricted Scheme through a Special Scheme.

[12] IFSCA Circular F. No. 188/IFSCA/FM/2025-26 dated 14 October 2025, Framework on Stewardship Code in IFSC.

[13] IFSCA Circular F. No. IFSCA-IF-10PR/7/2024-Capital Markets/10042026 dated 10 April 2026, Governance and oversight of Schemes in IFSC – Segregation of the role of Fiduciaries.

[14]IFSCA Circular No. IFSCA-SOF/2/2026-Capital Markets dated 26 August 2026, Requirement for FME to maintain a website or webpage.

[15] IFSCA Circular F. No. 282/IFSCA/FM/2026-27 dated 15 September 2026, Framework for Differential Distribution Rights for Units.

[16] AIF Regulations, Regulations 15, 16 and 17.

[17] SEBI, Data relating to activities of AIF, cumulative figures as at 30 June 2026.

[18] SEBI (Mutual Funds) Regulations, 2026, effective from 1 April 2026, replacing the SEBI (Mutual Funds) Regulations, 1996.

[19] SEBI, Data relating to activities of AIFs, cumulative net figures as at 30 June 2026; IFSCA, IFSCA Bulletin, Q1 FY 2026–27 (April-June 2026), “IFSC – Business Trends: Fund Management”, p. 9.

[20]RBI, framework governing investments by regulated entities in AIFs, as amended.

[21]IRDAI, Investment Regulations, as applicable to life and general insurance companies.

[22]PFRDA, Pension Fund Regulations, as amended, governing pension fund investment norms.

[23] ET Bureau, “AIFs could get up to Rs 17,000 crore after PFRDA opens NPS door”, The Economic Times, 11 March 2026, https://economictimes.indiatimes.com/markets/stocks/news/aifs-could-get-upto-rs-17000-crore-after-pfrda-opens-nps-door/articleshow/129429307.cms.

[24]SEBI (Real Estate Investment Trusts) Regulations, 2014, as amended.

[25]AIF Regulations, Regulation 17(d).

[26]SEBI, Consultation Paper on Review of Investor Consent and Related Party Transactions for AIFs, June 2026.

[27]Income-tax Act, 2025 (Act No. 30 of 2025); Income-tax Rules, 2026, published 20 March 2026, effective 1 April 2026.

[28]IT Act 2025, provisions corresponding to erstwhile section 115UB of the Income-tax Act, 1961.

[29]IT Act 2025, provisions corresponding to erstwhile sections 80LA and 10(4D)–10(4F) of the Income-tax Act, 1961.

[30] IT Act 2025, section 224(2)(b), with effect from 1 April 2026.

[31] Monetary Authority of Singapore, Asset Management Survey 2025. The reported AUM of S$6.7 trillion is approximately equivalent to US$5.2 trillion.

[32] Securities and Futures Commission, Hong Kong, Asset and Wealth Management Activities Survey 2025. Hong Kong reported AUM of HK$42.2 trillion in 2025, equivalent to approximately US$5.42 trillion.

[33] Association of Mutual Funds in India (AMFI), Indian Mutual Fund Industry’s Average Assets Under Management. The industry’s AUM stood at 82.64 trillion rupees as at 30 September 2026; the US$ figure is an approximate conversion.

[34] International Financial Services Centres Authority (IFSCA), IFSCA Bulletin, Q1 FY 2026–27 (April–June 2026).