My client's Category II AIF has not distributed anything for two years, but the Form 64C shows income allocated to him and he is being asked to pay tax on it. Can he be taxed on money he has not received, and will he be taxed again when the fund finally pays it out?
Yes to the first and no to the second. Section 115UB(6) provides that income accruing or arising to, or received by, the investment fund during a previous year which is not paid or credited to the unit holder shall — subject to the provisions of sub-section (2) — be deemed to have been credited to his account on the last day of the previous year, in the same proportion in which he would have been entitled to receive it had it been paid in that year. Explanation 2 then declares, for the removal of doubts, that income already included in his total income in a previous year on the footing that it accrued or arose in that year shall not be included again in the previous year in which the fund actually pays it to him. Sub-section (5) separately provides that Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 115UB sub-sections (4), (5) and (6) and Explanation 2 as printed on incometaxindia.gov.in/w/section-115ub, Year stamp 2026, and identically on incometaxindia.gov.in/w/section-115ub-6, Year stamp 2016. It bears on section 115UB, section 115UB(4), section 115UB(5), section 115UB(6), section 115UB(2), section 115U, section 115U(4), section 115U(5), section 194LBB, section 10(23FBA), section 10(23FBB), section Rule 12CB of the Income Tax Act 1961, in Charitable Trusts & Exemption, Assessment & Scrutiny and Capital Gains Exemptions matters.
This is the provision that produces the dry-tax problem in AIF investing, and it is worth stating plainly because a client will not otherwise believe it: he is taxed on his proportionate share of what the fund earned, in the year the fund earned it, whether or not a rupee reaches him. That is why the Form 64C statement under rule 12CB matters so much, and why an investor who ignores it because he received no distribution files a wrong return. Three details decide most of the arguments. First, the deeming is expressly "subject to the provisions of sub-section (2)" — the loss provision — so the accrual rule and the loss rule have to be read together rather than applied in sequence. Second, the deeming fixes both the date and the proportion: the last day of the previous year, and the proportion in which the unit holder would have been entitled to receive the income had it been paid in that year. It is the entitlement under the fund documents that governs, not any actual allocation the manager may make later. Third, Explanation 2 is the protection against the obvious double count, and it is drafted narrowly: it applies to income which "has been included in total income" of the unit holder in an earlier previous year on account of accrual. So the investor has to be able to show that it was in fact included — which means keeping the earlier Form 64C, the earlier return and the earlier computation, sometimes for years, and matching them against the distribution when it comes. There is a useful contrast with the older venture capital Chapter. Section 115U(5) makes the same deeming for a venture capital company or fund and section 115U Explanation 2 gives the same protection, but section 115U(5) is not made subject to any loss provision, and section 115U(4) bars Chapter XVII-B — withholding — altogether, whereas an investment fund inside section 115UB deducts under section 194LBB. Section 115UB(5) disapplies only Chapter XII-D and Chapter XII-E, not Chapter XVII-B.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 115UB stands in Chapter XII-FB of the Income-tax Act, 1961. Sub-section (4) charges the total income of the investment fund at the rate or rates specified in the Finance Act of the relevant year where the fund is a company or a firm, and at the maximum marginal rate in any other case. Sub-section (5) disapplies Chapter XII-D and Chapter XII-E to income paid by an investment fund under the Chapter. Sub-section (6) contains the accrual deeming rule. Explanation 2 contains the removal-of-doubts protection against the same income being taxed twice. The text of all four is identical on the departmental page stamped Year 2026 and on the archived page stamped Year 2016.
Statutory position — no holding is asserted; this entry reproduces statutory text. Income accruing or arising to, or received by, an investment fund during a previous year which is not paid or credited to the unit holder is, subject to sub-section (2), deemed to have been credited to his account on the last day of that previous year in the same proportion in which he would have been entitled to receive it had it been paid in that year. Income so included in his total income on the footing of accrual is not to be included again in the previous year in which the fund actually pays it to him. Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter; Chapter XVII-B is not disapplied.
Not applicable — statutory text.
The income accruing or arising to, or received by, the investment fund, during a previous year, if not paid or credited to the person referred to in sub-section (1), shall subject to the provisions of sub-section (2), be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year.
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Handle my notice → Ask a CA on WhatsAppYes to the first and no to the second. Section 115UB(6) provides that income accruing or arising to, or received by, the investment fund during a previous year which is not paid or credited to the unit holder shall — subject to the provisions of sub-section (2) — be deemed to have been credited to his account on the last day of the previous year, in the same proportion in which he would have been entitled to receive it had it been paid in that year. Explanation 2 then declares, for the removal of doubts, that income already included in his total income in a previous year on the footing that it accrued or arose in that year shall not be included again in the previous year in which the fund actually pays it to him. Sub-section (5) separately provides that Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 115UB, section 115UB(4), section 115UB(5), section 115UB(6), section 115UB(2), section 115U, section 115U(4), section 115U(5), section 194LBB, section 10(23FBA), section 10(23FBB), section Rule 12CB of the Income Tax Act 1961. It is reported as Section 115UB sub-sections (4), (5) and (6) and Explanation 2 as printed on incometaxindia.gov.in/w/section-115ub, Year stamp 2026, and identically on incometaxindia.gov.in/w/section-115ub-6, Year stamp 2016. This is the provision that produces the dry-tax problem in AIF investing, and it is worth stating plainly because a client will not otherwise believe it: he is taxed on his proportionate share of what the fund earned, in the year the fund earned it, whether or not a rupee reaches him. That is why the Form 64C statement under rule 12CB matters so much, and why an investor who ignores it because he received no distribution files a wrong return. Three details decide most of the arguments. First, the deeming is expressly "subject to the provisions of sub-section (2)" — the loss provision — so the accrual rule and the loss rule have to be read together rather than applied in sequence. Second, the deeming fixes both the date and the proportion: the last day of the previous year, and the proportion in which the unit holder would have been entitled to receive the income had it been paid in that year. It is the entitlement under the fund documents that governs, not any actual allocation the manager may make later. Third, Explanation 2 is the protection against the obvious double count, and it is drafted narrowly: it applies to income which "has been included in total income" of the unit holder in an earlier previous year on account of accrual. So the investor has to be able to show that it was in fact included — which means keeping the earlier Form 64C, the earlier return and the earlier computation, sometimes for years, and matching them against the distribution when it comes. There is a useful contrast with the older venture capital Chapter. Section 115U(5) makes the same deeming for a venture capital company or fund and section 115U Explanation 2 gives the same protection, but section 115U(5) is not made subject to any loss provision, and section 115U(4) bars Chapter XVII-B — withholding — altogether, whereas an investment fund inside section 115UB deducts under section 194LBB. Section 115UB(5) disapplies only Chapter XII-D and Chapter XII-E, not Chapter XVII-B. If it applies to you, the first step is this: Return the Form 64C figures in the year of accrual even where no distribution was received, and keep the statement with the return; the charge arises on the last day of that previous year by force of sub-section (6), not on receipt.
Section 115UB stands in Chapter XII-FB of the Income-tax Act, 1961. Sub-section (4) charges the total income of the investment fund at the rate or rates specified in the Finance Act of the relevant year where the fund is a company or a firm, and at the maximum marginal rate in any other case. Sub-section (5) disapplies Chapter XII-D and Chapter XII-E to income paid by an investment fund under the Chapter. Sub-section (6) contains the accrual deeming rule. Explanation 2 contains the removal-of-doubts protection against the same income being taxed twice. The text of all four is identical on the departmental page stamped Year 2026 and on the archived page stamped Year 2016. It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text. Income accruing or arising to, or received by, an investment fund during a previous year which is not paid or credited to the unit holder is, subject to sub-section (2), deemed to have been credited to his account on the last day of that previous year in the same proportion in which he would have been entitled to receive it had it been paid in that year. Income so included in his total income on the footing of accrual is not to be included again in the previous year in which the fund actually pays it to him. Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter; Chapter XVII-B is not disapplied.
Not applicable — statutory text. In the words reproduced by the source cited on this page: "The income accruing or arising to, or received by, the investment fund, during a previous year, if not paid or credited to the person referred to in sub-section (1), shall subject to the provisions of sub-section (2), be deemed to have been credited to the account of the said person on the last day of the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year."
It was decided by the CBDT Circulars & Instructions and is reported as Section 115UB sub-sections (4), (5) and (6) and Explanation 2 as printed on incometaxindia.gov.in/w/section-115ub, Year stamp 2026, and identically on incometaxindia.gov.in/w/section-115ub-6, Year stamp 2016. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 115UB, section 115UB(4), section 115UB(5), section 115UB(6), section 115UB(2), section 115U, section 115U(4), section 115U(5), section 194LBB, section 10(23FBA), section 10(23FBB), section Rule 12CB, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text. Income accruing or arising to, or received by, an investment fund during a previous year which is not paid or credited to the unit holder is, subject to sub-section (2), deemed to have been credited to his account on the last day of that previous year in the same proportion in which he would have been entitled to receive it had it been paid in that year. Income so included in his total income on the footing of accrual is not to be included again in the previous year in which the fund actually pays it to him. Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter; Chapter XVII-B is not disapplied. It arises in Charitable Trusts & Exemption, Assessment & Scrutiny and Capital Gains Exemptions matters, on section 115UB, section 115UB(4), section 115UB(5), section 115UB(6), section 115UB(2), section 115U, section 115U(4), section 115U(5), section 194LBB, section 10(23FBA), section 10(23FBB), section Rule 12CB of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Maintain a running schedule per investor of income taxed on accrual, year by year, against distributions actually received, so that Explanation 2 can be invoked with evidence when the distribution comes. The Explanation protects only income that WAS included in total income earlier. Read sub-section (6) with sub-section (2) rather than after it — the deeming is expressly subject to sub-section (2), so a year in which the fund has a loss is not dealt with by the accrual rule alone. Fix the investor's proportionate entitlement from the fund documents for the year in question, because sub-section (6) allocates in the proportion in which he would have been entitled to receive the income had it been paid in that previous year. Do not carry the section 115U withholding bar across. Section 115UB(5) disapplies only Chapter XII-D and Chapter XII-E; an investment fund still deducts under section 194LBB, whereas section 115U(4) disapplies Chapter XVII-B for a venture capital fund.
Still good law. The sub-sections were read on a departmental page of the Income-tax Act, 1961 that printed the section heading "Tax on income of investment fund and its unit holders" and carried a Year stamp of 2026, and again in identical words on the archived page stamped Year 2016, which shows the text unaltered across the section's life. Neither page prints a footnote list, so no commencement date is asserted. No judicial treatment of sub-section (6) or of Explanation 2 was searched for on this pass, so none is claimed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Sub-sections (4), (5) and (6) and Explanation 2 were transcribed as a demanded continuous run, in that sequence, from the departmental page /w/section-115ub carrying a Year stamp of 2026, on a fetch required to name the Act and print the section heading "Tax on income of investment fund and its unit holders" first and forbidden to answer "absent". The identical run was then transcribed from the archived page /w/section-115ub-6 carrying a Year stamp of 2016, and the two are word for word the same, which brackets the text across the whole life of the section and shows these sub-sections have not been touched. Neither page prints a footnote list, so no amending instrument or commencement date could be sourced for any sub-section of section 115UB from the department, and for that reason the commencement field is null. Section 115UB itself was inserted with effect from 1 April 2016 — that much is implied by the parallel proviso to section 10(23FB) inserted by section 7(III)(b) of the Finance Act, 2015, which speaks of an investment fund specified in clause (a) of Explanation 1 to section 115UB and is expressed to operate from that date, and by section 115U(6), which uses the same formula — but the enacting section of the Finance Act, 2015 for section 115UB itself was not retrieved on this pass, so no date is asserted in the date field. Sub-section (2), to which the deeming in sub-section (6) is made subject, is not reproduced here; the library already holds a separate entry on section 115UB(2) and (2A). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text. Income accruing or arising to, or received by, an investment fund during a previous year which is not paid or credited to the unit holder is, subject to sub-section (2), deemed to have been credited to his account on the last day of that previous year in the same proportion in which he would have been entitled to receive it had it been paid in that year. Income so included in his total income on the footing of accrual is not to be included again in the previous year in which the fund actually pays it to him. Chapter XII-D and Chapter XII-E do not apply to income paid by an investment fund under the Chapter; Chapter XVII-B is not disapplied.
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