In GIFT City, Category I, II and III AIFs are, for restricted schemes, three filing labels for one product, which a Registered FME files with IFSCA. A Category III AIF is one following “diverse or complex trading strategies”; desirable sectors go in Category I and everything else in Category II (Reg. 30(1), IFSCA (Fund Management) Regulations, 2025). Most rules are common to all three; the real differences are open- or close-ended structure, tax and the filing fee.

This article uses the FM Regulations as amended up to 10 September 2026. “Reg.” means a regulation of the FM Regulations unless stated otherwise. For the launch process itself, see GIFT City AIF setup.

Table of Contents

What a restricted scheme is

A restricted scheme is “a scheme offered on private placement basis only to ‘accredited investors’ or investors investing at least USD 1,50,000 and not having more than 1000 investors” (Reg. 2(1)(ee)). Only a Registered FME (Non-Retail or Retail) may launch one (Reg. 31(1); FAQ Q41).

Category	Test in Reg. 30(1)	Examples named
I	Start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors “which the government or regulators consider as socially or economically desirable” (cl. (a))	VC funds, SME funds, social venture or impact funds, infrastructure funds, ESG funds, special situation funds
III	“diverse or complex trading strategies including investment in listed or unlisted derivatives” (cl. (b))	None
II	“investment which does not fall under the clauses (a) and (b)” (cl. (c))	None: it is the residual category

Each scheme “may be construed as” the same category of AIF for the Income Tax Act, 1961 and FEMA (Reg. 30(1), Explanations).

How this maps to SEBI’s categories

The labels follow the SEBI (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regs”), but four differences matter. The SEBI provisions cited are from the text amended up to 14 July 2026. SEBI’s Third Amendment of 15 October 2026 implements Board decisions of 24 September 2026 (PR No. 59/2026), chiefly on accredited investors; the provisions cited here should be read with it.

Leverage is not part of the IFSC test. SEBI’s Category II “does not undertake leverage or borrowing other than as permitted” and Category III “may employ leverage” (SEBI AIF Reg. 3(4)(b), (c)). In IFSC, every restricted scheme may borrow, within the PPM limits in Reg. 37.
No per-investee cap. SEBI caps Category I and II at 25% of investable funds in one investee company and Category III at 10%, with higher limits for large value funds for accredited investors (50% and 20%) (SEBI AIF Reg. 15(1)(c), (d)). The FM Regulations contain no such cap for restricted schemes.
Shorter tenure. SEBI Category I and II funds run at least three years (SEBI AIF Reg. 13(2)); a close-ended IFSC restricted scheme, at least one (Reg. 33(2)).
Venture capital sits in two places. IFSC also has a separate venture capital scheme, filed as a “venture capital fund” under Category I (Reg. 18). A VC fund filed instead as a Category I restricted scheme need not meet those Part A conditions (Reg. 30(1)(a), Explanation II).

The wider choice between the regimes is covered in SEBI AIF vs GIFT City fund.

Open-ended or close-ended

Category I and II schemes “shall be filed before the Authority as a close-ended scheme”; Category III “either as a close-ended scheme or an open-ended scheme” (Reg. 30(2); FAQ Q44). Reg. 33(1) says restricted schemes “may be launched as open ended or close ended”, but read with Reg. 30(2) that option is for Category III. The FAQ notes one exception: under a circular of 1 March 2023, the close-ended rule does not apply to a sovereign wealth fund’s FME (FAQ Q175).

An open-ended scheme carries extra rules:

at most 25% of corpus in unlisted securities, and none until it reaches USD 3 million. An open-ended fund of funds is exempt from the 25% limit if it invests in open-ended schemes that themselves hold no more than 25% unlisted (Reg. 35(1) and provisos);
it may start investing at USD 1 million but must reach USD 3 million within 12 months of the PPM being taken on record (Reg. 35(2));
no 20% allowance for physical assets, which is for close-ended schemes (Reg. 34(3));
monthly NAV disclosure (Reg. 36(3)), a higher sponsor minimum (Reg. 40(1)(b)) and a custodian at any size (Reg. 132(b)). A custodian is not mandatory for a fund of funds whose underlying schemes have independent custodians (Reg. 132, proviso).

Rules common to all three categories

Investors and corpus: at most 1,000 investors; at least USD 150,000 each (USD 40,000 for the FME’s employees, directors or designated partners; no minimum for accredited investors) (Reg. 32). Minimum corpus USD 3 million, with no maximum in Part B (a scheme under a third-party fund management arrangement is capped at USD 50 million, Reg. 107G(1)) (Reg. 35(2)). The accredited investor tests are covered in who can invest in your GIFT City fund.
Legal form: company, LLP or trust in IFSC (Reg. 33(5)).
Investments: unlisted and listed securities, money market and debt instruments, securitised debt, units of other schemes, “derivatives including commodity derivatives”, LLPs, in “IFSC, India or foreign jurisdiction” (Reg. 34(1)). Derivatives are therefore open to Category I and II schemes too, if disclosed in the PPM. Category follows Reg. 30(1), however: a strategy built on “diverse or complex trading strategies including investment in listed or unlisted derivatives” is Category III. Hedging a long-only or private-markets portfolio is different from a derivatives-driven strategy.
Leverage: the PPM must state the maximum and how it is calculated; deviation needs two-thirds of investors by value; the FME needs a risk management framework (Reg. 37).
Conflicts: investing in an associate, or trading with associates, other schemes of the FME or a 50%+ investor, needs approval from 75% of investors by value (Reg. 35(3)–(4)).
Valuation and disclosure: independent valuer (Reg. 38(2)); portfolio disclosed quarterly (Reg. 36(4)).
Close-ended tenure: at least one year, extendable by up to two years with two-thirds approval by value; beyond that, only with willing investors’ consent and an exit for dissenters (Reg. 33(2)–(4)).

The custodian requirement (Reg. 132) has a transition. An IFSC custodian may be appointed within 24 months from 30 January 2026, and until then an independent custodian in India or a regulated foreign custodian may be used (Reg. 132, Explanation II).

Reg. 35(5) lets IFSCA set “additional conditions” for each category. No circular setting such conditions was found.

Category I, II and III compared

Attribute	Category I	Category II	Category III
Open or close-ended	Close-ended (Reg. 30(2))	Close-ended (Reg. 30(2))	Either (Reg. 30(2))
Minimum tenure	1 year (Reg. 33(2))	1 year (Reg. 33(2))	1 year if close-ended (Reg. 33(2))
Minimum corpus	USD 3m (Reg. 35(2))	USD 3m (Reg. 35(2))	USD 3m; open-ended may start at USD 1m (Reg. 35(2))
Minimum investment	USD 150,000; none for accredited investors (Reg. 32(2))	Same (Reg. 32(2))	Same (Reg. 32(2))
Maximum investors	1,000 (Reg. 32(1))	1,000 (Reg. 32(1))	1,000 (Reg. 32(1))
Unlisted securities	No cap (Reg. 34(1))	No cap (Reg. 34(1))	Open-ended: max 25% of corpus, with a fund of funds exception (Reg. 35(1))
Physical assets	Up to 20% of corpus (Reg. 34(3))	Up to 20% (Reg. 34(3))	Close-ended only, up to 20% (Reg. 34(3))
Leverage	As disclosed in PPM (Reg. 37)	As disclosed (Reg. 37)	As disclosed (Reg. 37)
FME/sponsor contribution	Lower of 2.5% of corpus or USD 750,000, normally max 10% (Reg. 40(1)(a))	Same (Reg. 40(1)(a))	Close-ended: as Cat I. Open-ended: lower of 5% or USD 1.5m, normally max 10% (Reg. 40(1)(b))
NAV disclosure	Half-yearly; yearly with prior approval of 75% of investors by value (Reg. 36(3))	Same (Reg. 36(3))	Monthly if open-ended; as Category I if close-ended (Reg. 36(3))
Custodian	If AUM above USD 70m (Reg. 132(c))	Same (Reg. 132(c))	Always if open-ended (Reg. 132(b))
Filing fee	USD 5,000	USD 10,000	USD 15,000 (Fee Circular 2026, Sch. I, Pt 2(A), item viii)
Income tax	Pass-through (s. 224, Income-tax Act 2025), subject to the 2022 cross-reference point below	Pass-through (s. 224), same point	Specified fund, if the non-resident test is met (Sch. VI, Note 1(g)), same point

Each scheme also pays an annual fee of USD 1,000, except co-investment Special Schemes (Fee Circular 2026, item viii). The fee circular applies from FY 2026-27 (1 April 2026).

Category III AIF in GIFT City: long-short, arbitrage and derivatives

The FM Regulations do not define “long-short” or “arbitrage” and set no strategy-specific rules for them. The only test is whether the scheme undertakes “diverse or complex trading strategies including investment in listed or unlisted derivatives” (Reg. 30(1)(b)), wording close to SEBI’s “hedge fund” definition (SEBI AIF Reg. 2(1)(l)). For a long-short or arbitrage fund:

Structure. If investors need redemptions, only Category III may be open-ended (Reg. 30(2)), with the extra rules above.
Instruments. Listed securities, derivatives and commodity derivatives are permitted (Reg. 34(1)(b), (g)). A retail scheme, by contrast, may use derivatives “only for the purpose of hedging” (Reg. 46(1)(g)).
Leverage and shorts. The FM Regulations set no numerical cap. Reg. 37 requires the PPM to state maximum leverage and the method, two-thirds investor consent for deviation, and a risk framework. The method would need to cover long, short and derivative exposure. Limits outside the Regulations also apply, such as FPI derivative position limits under SEBI’s FPI Master Circular for a fund investing in Indian markets, and exchange, clearing and counterparty terms.
Indian listed securities. A scheme investing in them must register as a foreign portfolio investor (IFSCA circular, 2 May 2024, para 1).
Tax. Only a Category III AIF (among restricted schemes) can be a “specified fund” (see the tax section).

Choosing a category for common strategies

The PPM’s description of the strategy decides the category. The table applies the text; it is not a view on any particular fund.

Strategy	Where the text points	Points to check
Venture capital	VC scheme (filed as Cat I) or Cat I restricted scheme (Regs. 18, 30(1)(a))	A VC scheme allows 50 investors, a USD 250,000 ticket and a USD 200m cap, needs 3 years’ tenure and 80% in companies up to 10 years old (Regs. 20, 21, 23). Reg. 20’s Explanation points larger investor bases to restricted schemes
Angel	VC scheme, as an angel fund (Reg. 2(1)(mm))	Angel funds are defined in Reg. 2(1)(mm); their conditions are not covered here
Infrastructure, SME, impact, ESG	Category I (Reg. 30(1)(a))	ESG disclosure circular, 18 January 2023; senior and junior units (Reg. 35(6))
Stressed assets	Special situation fund, named in Cat I (Regs. 30(1)(a), 53–60)	Close-ended, 3 years minimum, only “special situation assets”, borrowing only for day-to-day needs (Regs. 56, 57, 59); corpus and investors “as may be specified” (Reg. 58)
Private credit	Category II, as residual (Reg. 30(1)(c))	Close-ended; leverage if disclosed (Regs. 30(2), 37)
Private equity, buyout	Category II, unless in a Cat I sector (Reg. 30(1))	Co-investment SPVs (below)
Real estate	Category II unless infrastructure	Physical assets capped at 20% of corpus, close-ended only (Reg. 34(3)); REITs have a separate Investment Trust regime
Long-short, arbitrage, derivatives	Category III (Reg. 30(1)(b))	See above
Fund of funds	Not assigned a category as such (Reg. 2(1)(p)); classify under Reg. 30(1)	Carve-outs for the 25% unlisted limit, sponsor commitment, related-party approval, valuation and custody (Regs. 35(1), 35(4), 38(2), 40(4)(c), (e), 132)

A manager regulated in its home jurisdiction but without its own FME can have an authorised IFSC FME launch and manage a restricted scheme of up to USD 50 million for it (Regs. 107B, 107G(1), 107H); the FME remains responsible for the scheme. See launching a GIFT City AIF without your own FME.

Co-investment, unit classes and listing

Co-investment. A restricted scheme may co-invest through an SPV or a segregated portfolio, never on better terms than the common portfolio (Reg. 41). Under IFSCA’s framework of 21 May 2025, the SPV “Special Scheme” takes the same category as the existing scheme (para 1(c)). The existing scheme must hold at least 25% (para 1(d)). The SPV invests in one portfolio company (para 2(b)), with leverage within the existing PPM’s limits (para 7(a)). A term sheet is filed within 45 days of investment (para 5(a)).

Senior and junior units. Since 10 September 2026 a restricted scheme may issue senior and junior or subordinate units (Reg. 35(6)). The framework of 25 September 2026 allows one senior class and sets a USD 2 million minimum for junior units. The minimum is USD 1 million for an accredited investor that qualifies under the non-individual criteria (paras 1(c) to (f)) of the January 2024 accredited-investor circular, and does not apply to grants (paras 3(1), 7).

Listing. An FME “may list” open-ended and close-ended schemes on a recognised IFSC exchange (Regs. 108, 109), with the exchange’s in-principle approval (Reg. 112(1)). For restricted schemes it is optional (FAQ Q149–150).

Changing category or strategy

The FM Regulations contain no express procedure for moving a restricted scheme between categories. By contrast, an FME needs IFSCA’s prior approval to change its own category (Reg. 13(2)), and a SEBI AIF needs “the approval of the Board” (SEBI AIF Reg. 7(2)). The provisions that do apply to a change of strategy are:

consent from two-thirds of investors by value (Reg. 36(2));
informing IFSCA “immediately” of material PPM changes (Reg. 31(4));
a USD 500 fee to modify a scheme document (Fee Circular 2026, para 7.2).

A move between close-ended Category I or II and open-ended Category III also changes structure and tax treatment. No IFSCA guidance on such a move was found.

Tax in brief: pass-through for Categories I and II, specified fund for Category III

Categories I and II are “investment funds” (s. 224(10)(a), Income-tax Act 2025), a definition that still refers to the repealed 2022 Regulations (see below). Unit holders are taxed as if the fund’s investments had been made directly by them (s. 224(1)). The fund is exempt on income other than business income (Schedule V, Sl. 1).
Category III. An IFSC Category III AIF is a “specified fund” if “all the units other than the unit held by a sponsor or manager are held by non-residents”, with a 5% allowance for holders who later become resident (Schedule VI, Note 1(g), as amended by Finance Act 2026, s. 125). Its Sl. 1–4 income is exempt to the extent attributable to non-resident units, and unit holders are exempt on income from the fund (Sl. 9). Taxable income in respect of securities (not capital gains) attributable to non-residents is taxed at 10%; capital gains carry other s. 210 rates (s. 210(1), (2)).

For the Income Tax Act, 1961, IFSCA’s communication that a PPM is taken on record “shall be construed as Certificate of Registration” (Reg. 31(2), Explanation). The Regulations have not been updated for the Income-tax Act, 2025. Note 1(g)(i), s. 224(10)(a), s. 70(2) (“resultant fund”) and Schedule V still refer to the repealed 2022 Regulations, and Schedule VI Note 1(g)(i) does so even as amended by Finance Act 2026. The tax outcomes above therefore rest on Reg. 148(4), which deems such references to be to the corresponding 2025 provisions. We found no CBDT statement confirming this for tax. Detail is in GIFT City tax benefits for funds, and the wider framework is on the GIFT City page.

Common questions

What is a Category 3 AIF in GIFT City? A restricted scheme filed as a Category III AIF because it follows “diverse or complex trading strategies including investment in listed or unlisted derivatives”. It is the only category that may be open-ended (Reg. 30(1)(b), (2)).

Can a Category I or Category II AIF in GIFT City be open-ended? No. Both are filed as close-ended (Reg. 30(2)), apart from the FAQ’s sovereign wealth fund dispensation (FAQ Q175).

Is leverage allowed only in Category III? No. Any restricted scheme may borrow within the limit and method in its PPM (Reg. 37). The FM Regulations set no numerical cap, but limits outside them can apply. SEBI allows Category I and II AIFs only temporary borrowing (SEBI AIF Regs. 16(1)(c), 17(c)).

What is the minimum investment in a GIFT City Category III AIF? USD 150,000 per investor, USD 40,000 for the FME’s staff and directors, and none for accredited investors (Reg. 32(2)). The scheme needs a USD 3 million corpus (Reg. 35(2)).

How much must the manager invest in a Category III AIF? Close-ended: the lower of 2.5% of corpus or USD 750,000. Open-ended: the lower of 5% or USD 1.5 million. Both are normally capped at 10% and can be waived in the cases in Reg. 40(4).

Sources

International Financial Services Centres Authority (Fund Management) Regulations, 2025, as amended up to 10 September 2026 (consolidated). IFSCA, 14 September 2026. ifsca.gov.in
IFSCA (Fund Management) (Second Amendment) Regulations, 2026 (IFSCA/GN/2026/015). IFSCA, in force 10 September 2026. ifsca.gov.in
IFSCA (Fund Management) (Amendment) Regulations, 2026 (IFSCA/GN/2026/006). IFSCA, in force 30 January 2026. ifsca.gov.in
FAQs on IFSCA (Fund Management) Regulations, 2025. IFSCA, 3 August 2026. ifsca.gov.in
Accredited Investors in IFSC (F. No. IFSCA-IF-10PR/1/2023-Capital Markets). IFSCA, 25 January 2024. ifsca.gov.in
Framework to facilitate Co-investment by Venture Capital Scheme and Restricted Scheme (F. No. IFSCA-AIF/6/2025-Capital Markets). IFSCA, 21 May 2025. ifsca.gov.in
Framework for differential distribution in Venture Capital Schemes and Restricted Schemes to facilitate blended finance and other fund structures (F. No. IFSCA-DSF0SFHB/1/2025-Capital Markets). IFSCA, 25 September 2026. ifsca.gov.in
Disclosures by Fund Management Entities for Environmental, Social or Governance (ESG) Schemes (F. No. 756/IFSCA/ESG Schemes/2022-23). IFSCA, 18 January 2023. ifsca.gov.in
Facilitating investments by NRIs and OCIs into Indian securities through Schemes / Funds in an IFSC (F. No. IFSCA-IF-10PR/2/2024-Capital Markets). IFSCA, 2 May 2024. ifsca.gov.in
Fee structure for the entities undertaking or intending to undertake permissible activities in IFSC (IFSCA-DTFA/1/2026), applicable from FY 2026-27. IFSCA, 2 March 2026. ifsca.gov.in
SEBI (Alternative Investment Funds) Regulations, 2012, as amended up to 14 July 2026. SEBI. sebi.gov.in
Income-tax Act, 2025, s. 224 (Tax on income of investment fund and its unit holders). Income Tax Department. incometaxindia.gov.in
Income-tax Act, 2025, Schedule V. Income Tax Department. incometaxindia.gov.in
Income-tax Act, 2025, Schedule VI (page shows pre-Finance Act 2026 text). Income Tax Department. incometaxindia.gov.in
Income-tax Act, 2025, s. 210. Income Tax Department. incometaxindia.gov.in
Finance Act, 2026 (Act No. 4 of 2026), s. 125. Ministry of Law and Justice, Gazette of India, 30 March 2026. Official URL for the Act PDF not located
Corrigendum to fee circular (IFSCA-DTFA/2/2026). IFSCA, 13 March 2026. Official URL not located
Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2026. SEBI, 15 October 2026. sebi.gov.in
Key decisions of the 215th SEBI Board meeting (PR No. 59/2026). SEBI, 24 September 2026. sebi.gov.in
Master Circular for Foreign Portfolio Investors (SEBI/HO/AFD/AFD-PoD-2/P/CIR/2024/70). SEBI, 30 May 2024. Official URL not located

Category I, II and III AIFs in GIFT City: Rules Compared