Its because the function signature is different and does not take any params.

You can add a ...args do this

interface ISelectInput {
  placeholder?: string;
  onChange: (...args: any) => void;
  children: Record<string, any>[];
}

or use your event as optional and do

interface ISelectInput {
  placeholder?: string;
  onChange: (event?: any) => void;
  children: Record<string, any>[];
}

This error is because onChange in IselectInput is of type () => void, that is, it should receive a function with no input. But here, the handleSelectCategory function receives an (event).
For this error, you need to change the handleSelectCategory function from event: ‍string because at the end of the code, I want to pass a value from event.target.value (selected value from SelectInput) to setSelectedCategory as the selected category.

<!-- begin snippet: js hide: false console: true babel: false -->

<!-- language: lang-js -->

interface ISelectInput {
  placeholder?: string;
  onChange: (category: string) => void;
  children: Record<string, any>[];
}
const handleSelectCategory = (event: any) => {
  const category = event.target.value;
  setSelectedCategory(category);
};
<SelectInput
  placeholder="Select input"
  onChange={handleSelectCategory}
>
  {uniqueCategories}
</SelectInput>

<!-- end snippet -->

Functions are contravariant with respect to their parameters. This also includes arity. In other words, you can assign a () => void to (event: any) => void, but not the other way around. That's because if I assign a (event: any) => void to somewhere that expects () => void, the function will be called without an argument, and therefore it is unsound.

It is a simple fix, however. Just define onChange to take an argument:

interface ISelectInput {
    placeholder?: string;
    onChange: (event: any) => void;
    children: Record<string, any>[];
}

I would also suggest that instead of using any, you should use the proper type, perhaps an InputEvent.

Playground (demonstrating use of InputEvent with guard clauses)