Section 224 — Tax on income of investment fund and its unit holders. Successor to s.115UB of the 1961 Act.
Section 224 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) is the pass-through rule: where a unit holder of an investment fund receives income, or income accrues or arises to him, out of investments made in the fund, that income is chargeable to income-tax in the same manner as if the fund's investments had been made directly by him. It overrides any other provision and is subject to the rest of the section.
Sub-section (2) deals with a year in which the fund's total income, computed without giving effect to Schedule V (Table: Sl. No. 1), is a loss under a head that cannot be or is not wholly set off against another head that year. Clause (a) keeps a loss under "Profits and gains of business or profession" at the fund's level — carried forward and set off by the fund under Chapter VII, and ignored for sub-section (1). Clause (b) also requires any other loss to be ignored for sub-section (1) if it arose in respect of a unit not held by the unit holder for at least twelve months.
Sub-sections (3) and (4) handle the historical stock: a non-business loss accumulated at fund level as on 31 March 2019 is deemed to be the loss of the unit holder who held the unit on that date, in the same manner as under sub-section (1), and may be carried forward by him for the remaining period calculated from the year the loss first occurred, taking that year as the first, to be set off under Chapter VII; it is not available to the fund on or after 1 April 2019.
Sub-section (5) preserves character and proportion: income paid or credited by the fund is deemed to be of the same nature and in the same proportion in the unit holder's hands as if received by the fund, subject to sub-section (2). Sub-section (6) charges the fund's own total income at the rates in the Finance Act of the relevant year where the fund is a company or a firm, and at maximum marginal rate in any other case. Sub-section (7) deems income accruing to or received by the fund but not paid or credited to the unit holder to have been credited to his account on the last day of the tax year, in the proportion in which he would have been entitled to receive it. Sub-section (8) prevents double inclusion, by keeping income already included on accrual out of the year in which it is actually paid.
Sub-section (9) requires the person responsible for crediting or paying the income on behalf of the fund, and the fund, to furnish within the prescribed time a statement in the prescribed form, verified in the prescribed manner, giving details of the nature of income paid or credited during the tax year, to the person liable to tax on it and to the prescribed income-tax authority. Sub-section (10) defines "investment fund" as a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate holding a certificate of registration as a Category I or Category II Alternative Investment Fund and regulated under the sebi (Alternative Investment Funds) Regulations, 2012 or the International Financial Services Centres Authority (Fund Management) Regulations, 2022, and defines "trust" and "unit", the latter as the beneficial interest of an investor in the fund or a scheme of it, including shares or partnership interests.
A fund is a conduit, and taxing it as a separate person would add a layer that a direct investor would not bear, so sub-sections (1), (5) and (7) push the income out to unit holders with its character and proportion intact, on accrual, whether or not it is distributed. The exceptions run the other way, against exporting losses: a business loss is trapped at the fund, and a loss on a unit held less than twelve months is ignored, so a short-term entry into a loss-making fund buys no deduction.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Minimum holding period before a non-business loss passes through to the unit holder | At least twelve months | A loss other than a business loss is ignored for sub-section (1) if it arose in respect of a unit not held by the unit holder for at least this period | Sub-section (2)(b) |
| Cut-off date for the accumulated loss transfer | 31st March, 2019 | Non-business loss accumulated at fund level as on that date is deemed to be the loss of the unit holder who held the unit on that date | Sub-section (3) |
| Date from which the accumulated loss ceases to be the fund's | 1st April, 2019 | The loss deemed under sub-section (3) is not available to the investment fund on or after this date | Sub-section (4) |
| Rate on the fund's own total income where it is not a company or firm | Maximum marginal rate | Any case other than a fund that is a company or a firm, which is charged at the rates specified in the Finance Act of the relevant year | Sub-section (6)(b) |
| Deemed date of crediting undistributed income | The last day of the tax year | Income accruing, arising or received by the fund in a tax year and not paid or credited to the unit holder, in the proportion in which he would have been entitled to receive it | Sub-section (7) |
| Period for carry forward of the transferred accumulated loss | The remaining period, counted from the year in which the loss first occurred as the first year | Loss deemed under sub-section (3) to be that of the unit holder, set off as per Chapter VII | Sub-section (3)(b) |
A unit holder is taxed whether or not he has been paid: sub-section (7) deems undistributed income credited to him on the last day of the tax year in his entitlement proportion, and sub-section (8) keeps it out of the year of actual payment, so timing is settled at accrual. Character follows through under sub-section (5), so the head, and with it the rate and set-off rules, are decided by what the fund earned. Losses do not follow the same route. A business loss never reaches the unit holder — it stays with the fund under sub-section (2)(a), which is why a fund can distribute profits while carrying its own losses forward. Any other loss reaches him only if his unit has been held at least twelve months; below that it is simply ignored and is not preserved anywhere else. Registration is the gateway: sub-section (10)(a) confines the section to a Category I or Category II Alternative Investment Fund under one of the two named regulations.
A Category II Alternative Investment Fund earns, in a tax year, interest income of Rs. 10 crore and a capital loss of Rs. 4 crore, and distributes nothing. A unit holder entitled to 5% of the fund's income is treated under sub-section (7) as having been credited Rs. 50 lakh of interest on the last day of the tax year, taxable as interest under sub-section (5) even though he has received no money, and under sub-section (8) it is not taxed again when actually paid to him later. His 5% share of the capital loss passes through only if he has held his units for at least twelve months; if he bought in eight months earlier, sub-section (2)(b) requires that loss to be ignored. Had the Rs. 4 crore been a business loss instead, sub-section (2)(a) would keep it at the fund's level in every case.
Most directly in the statement furnished under sub-section (9) by the fund or the person paying on its behalf, which goes to the unit holder and to the prescribed income-tax authority; the section names no form number. It is met again in the unit holder's own return, and in any query on why income was returned in a year in which nothing was received.
as if, it were the income accruing or arising to, or received by, such person, had the investments made by the investment fund been made directly by him
if such loss has arisen in respect of a unit which has not been held by the unit holder for at least twelve months
be deemed to have been credited to the account of the said person on the last day of the tax year
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See the circulars index.
See the notifications index.
