Alternative Investment Funds (AIFs) are private investment vehicles regulated by SEBI, designed for sophisticated investors. They are classified into three categories: Category I includes venture capital and infrastructure funds; Category II encompasses real estate and private equity funds without leverage; and Category III involves hedge funds and other complex strategies. Taxation varies: Categories I and II enjoy pass-through status for tax exemption, while Category III does not. An amendment in the 2025 Budget defined securities held by AIFs in Categories I and II as capital assets, maintaining their capital gains status, thus clarifying their tax implications.