My client has invested in an Alternative Investment Fund. Is the fund's income taxed in the fund's hands or in his, and does it matter which category the fund is?
It matters more than anything else: section 115UB applies only to a fund granted a certificate of registration as a Category I or a Category II Alternative Investment Fund, so a Category III AIF is outside the section altogether and is taxed under the ordinary law applicable to its legal form. For a fund within the section, income accruing to a unit holder out of investments made in the fund is chargeable in his hands as if he had made the investments directly and retains its character, except income chargeable under the head profits and gains of business or profession, which is taxed in the fund's own hands — at Finance Act rates if the fund is a company or a firm, and at the maximum marginal rate in any other case.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2016-04-01, reported as Chapter XII-FB, consisting of section 115UB, inserted by the Finance Act, 2015 (Act No. 20 of 2015) with effect from 1 April 2016; text as printed on the Income Tax Department's section 115UB page stamped Year 2026. It bears on section 115UB, section 10(23FBA), section 10(23FBB), section 194LBB, section 115U, section 10(23FB) of the Income Tax Act 1961, in Charitable Trusts & Exemption, Capital Gains Exemptions, How Tax Law Is Read, Assessment & Scrutiny and Capital Gains matters.
The first thing to check on any AIF question is the category on the SEBI certificate, because the whole regime turns on it, and Explanation 1(a) to section 115UB is where the limitation sits. That Explanation also now extends the definition to a fund regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 — an IFSC fund management entity's scheme can therefore be an 'investment fund' for this section. Three further points recur in practice. First, the carve-out worked by sections 10(23FBA) and 10(23FBB) — which sit outside this section — is defined by HEAD of income, not by activity description: an Assessing Officer who re-labels interest, capital gains or a fee as business income destroys the pass-through for that stream, which is exactly the fight in the Chennai Tribunal's Sundaram Alternative Opportunities order. Second, Explanation 1(c) defines 'unit' as the beneficial interest of an investor 'in the investment fund or a scheme of the investment fund', which is the statutory foothold for the position that a scheme floated under a registered AIF trust need not itself hold a SEBI registration — the point decided in the Mumbai Tribunal's Edelweiss Crossover Opportunities order. Third, sub-section (6) deems income not actually paid or credited to have been credited on the last day of the previous year, so the unit holder is taxed on accrual at fund level whether or not he has received anything, and Explanation 2 then prevents the same income being taxed again when it is actually paid.
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 is headed 'Tax on income of investment fund and its unit holders'. Sub-section (1) provides that notwithstanding anything contained in any other provisions of the Act and subject to the provisions of Chapter XII-FB, any income accruing or arising to, or received by, a unit holder of an investment fund out of investments made in the investment fund shall be chargeable to income-tax in the same manner as if it were income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him. Sub-section (3) deems the income paid or credited by the fund to be of the same nature and in the same proportion in the unit holder's hands, subject to sub-section (2). Sub-section (4) charges the total income of the investment fund to tax 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) deems income accruing to or received by the fund and not paid or credited to the unit holder to have been credited to his account on the last day of the previous year in his proportion. Sub-section (7) requires the person responsible for crediting or paying the income and the fund to furnish a statement in the prescribed form to the person liable to tax and to the prescribed income-tax authority; the departmental footnote directs the reader to rule 12CB and Form Nos. 64C and 64D. Explanation 1(a) defines 'investment fund' as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022. Explanation 1(c) defines 'unit' as the beneficial interest of an investor in the investment fund or a scheme of the investment fund, including shares or partnership interests. Explanation 2 declares that income already included in the unit holder's total income on accrual is not to be included again when actually paid.
Statutory position — no holding is asserted; this entry reproduces statutory text. Section 115UB applies only to a fund which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, so a Category III Alternative Investment Fund falls outside Explanation 1(a) and outside the Chapter. Within such a fund, sub-section (1) charges income accruing to a unit holder out of investments made in the fund as if he had made the investments directly; sub-section (3) preserves its nature and proportion; sub-section (6) deems income not paid or credited to have been credited to him on the last day of the previous year; and sub-section (4) charges the fund's own total income 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. Section 115UB itself contains no carve-out of business income from the pass-through — the words "Profits and gains of business or profession" appear in the section only in sub-sections (2) and (2A), which deal with losses — and the proposition that a fund's business income is taxed at fund level and does not pass through rests on clauses (23FBA) and (23FBB) of section 10, which were not read this pass and are not quoted here.
The Chapter builds the conduit in the same way as Chapter XII-FA does for business trusts, but with the carve-out expressed by head of income rather than by a list of qualifying receipts. Sub-section (1) is the charge in the investor's hands and is framed on the fiction that he made the investments directly, which is why the character of the income and the rate applicable to him, not to the fund, govern. Sub-section (3) then preserves character and proportion, and sub-section (6) fixes the year by deeming undistributed income to be credited on the last day of the previous year, so the conduit cannot be used to defer. Sub-section (4) is the residual charge on whatever remains taxable at fund level, and the maximum marginal rate applies where the fund is a trust, which is the common structure. The definition in Explanation 1(a) is the gate: because it admits only a fund holding a Category I or Category II certificate, a Category III fund never enters the Chapter, and the whole apparatus — including the exemption in section 10(23FBA), which is drafted by reference to an investment fund as defined in Explanation 1(a) — is unavailable to it.
"investment fund" means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019);
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Handle my notice → Ask a CA on WhatsAppIt matters more than anything else: section 115UB applies only to a fund granted a certificate of registration as a Category I or a Category II Alternative Investment Fund, so a Category III AIF is outside the section altogether and is taxed under the ordinary law applicable to its legal form. For a fund within the section, income accruing to a unit holder out of investments made in the fund is chargeable in his hands as if he had made the investments directly and retains its character, except income chargeable under the head profits and gains of business or profession, which is taxed in the fund's own hands — at Finance Act rates if the fund is a company or a firm, and at the maximum marginal rate in any other case. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 115UB, section 10(23FBA), section 10(23FBB), section 194LBB, section 115U, section 10(23FB) of the Income Tax Act 1961. It is reported as Chapter XII-FB, consisting of section 115UB, inserted by the Finance Act, 2015 (Act No. 20 of 2015) with effect from 1 April 2016; text as printed on the Income Tax Department's section 115UB page stamped Year 2026. The first thing to check on any AIF question is the category on the SEBI certificate, because the whole regime turns on it, and Explanation 1(a) to section 115UB is where the limitation sits. That Explanation also now extends the definition to a fund regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 — an IFSC fund management entity's scheme can therefore be an 'investment fund' for this section. Three further points recur in practice. First, the carve-out worked by sections 10(23FBA) and 10(23FBB) — which sit outside this section — is defined by HEAD of income, not by activity description: an Assessing Officer who re-labels interest, capital gains or a fee as business income destroys the pass-through for that stream, which is exactly the fight in the Chennai Tribunal's Sundaram Alternative Opportunities order. Second, Explanation 1(c) defines 'unit' as the beneficial interest of an investor 'in the investment fund or a scheme of the investment fund', which is the statutory foothold for the position that a scheme floated under a registered AIF trust need not itself hold a SEBI registration — the point decided in the Mumbai Tribunal's Edelweiss Crossover Opportunities order. Third, sub-section (6) deems income not actually paid or credited to have been credited on the last day of the previous year, so the unit holder is taxed on accrual at fund level whether or not he has received anything, and Explanation 2 then prevents the same income being taxed again when it is actually paid. If it applies to you, the first step is this: Get the SEBI certificate of registration first and read the category off it. If it says Category III, stop — section 115UB does not apply and neither does the section 10(23FBA) exemption that rides on it.
Section 115UB is headed 'Tax on income of investment fund and its unit holders'. Sub-section (1) provides that notwithstanding anything contained in any other provisions of the Act and subject to the provisions of Chapter XII-FB, any income accruing or arising to, or received by, a unit holder of an investment fund out of investments made in the investment fund shall be chargeable to income-tax in the same manner as if it were income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him. Sub-section (3) deems the income paid or credited by the fund to be of the same nature and in the same proportion in the unit holder's hands, subject to sub-section (2). Sub-section (4) charges the total income of the investment fund to tax 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) deems income accruing to or received by the fund and not paid or credited to the unit holder to have been credited to his account on the last day of the previous year in his proportion. Sub-section (7) requires the person responsible for crediting or paying the income and the fund to furnish a statement in the prescribed form to the person liable to tax and to the prescribed income-tax authority; the departmental footnote directs the reader to rule 12CB and Form Nos. 64C and 64D. Explanation 1(a) defines 'investment fund' as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022. Explanation 1(c) defines 'unit' as the beneficial interest of an investor in the investment fund or a scheme of the investment fund, including shares or partnership interests. Explanation 2 declares that income already included in the unit holder's total income on accrual is not to be included again when actually paid. The matter was decided on 2016-04-01 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. Section 115UB applies only to a fund which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, so a Category III Alternative Investment Fund falls outside Explanation 1(a) and outside the Chapter. Within such a fund, sub-section (1) charges income accruing to a unit holder out of investments made in the fund as if he had made the investments directly; sub-section (3) preserves its nature and proportion; sub-section (6) deems income not paid or credited to have been credited to him on the last day of the previous year; and sub-section (4) charges the fund's own total income 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. Section 115UB itself contains no carve-out of business income from the pass-through — the words "Profits and gains of business or profession" appear in the section only in sub-sections (2) and (2A), which deal with losses — and the proposition that a fund's business income is taxed at fund level and does not pass through rests on clauses (23FBA) and (23FBB) of section 10, which were not read this pass and are not quoted here.
The Chapter builds the conduit in the same way as Chapter XII-FA does for business trusts, but with the carve-out expressed by head of income rather than by a list of qualifying receipts. Sub-section (1) is the charge in the investor's hands and is framed on the fiction that he made the investments directly, which is why the character of the income and the rate applicable to him, not to the fund, govern. Sub-section (3) then preserves character and proportion, and sub-section (6) fixes the year by deeming undistributed income to be credited on the last day of the previous year, so the conduit cannot be used to defer. Sub-section (4) is the residual charge on whatever remains taxable at fund level, and the maximum marginal rate applies where the fund is a trust, which is the common structure. The definition in Explanation 1(a) is the gate: because it admits only a fund holding a Category I or Category II certificate, a Category III fund never enters the Chapter, and the whole apparatus — including the exemption in section 10(23FBA), which is drafted by reference to an investment fund as defined in Explanation 1(a) — is unavailable to it. In the words reproduced by the source cited on this page: ""investment fund" means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019);"
It was decided by the CBDT Circulars & Instructions on 2016-04-01 and is reported as Chapter XII-FB, consisting of section 115UB, inserted by the Finance Act, 2015 (Act No. 20 of 2015) with effect from 1 April 2016; text as printed on the Income Tax Department's section 115UB page stamped Year 2026. 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 10(23FBA), section 10(23FBB), section 194LBB, section 115U, section 10(23FB), 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. Section 115UB applies only to a fund which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, so a Category III Alternative Investment Fund falls outside Explanation 1(a) and outside the Chapter. Within such a fund, sub-section (1) charges income accruing to a unit holder out of investments made in the fund as if he had made the investments directly; sub-section (3) preserves its nature and proportion; sub-section (6) deems income not paid or credited to have been credited to him on the last day of the previous year; and sub-section (4) charges the fund's own total income 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. Section 115UB itself contains no carve-out of business income from the pass-through — the words "Profits and gains of business or profession" appear in the section only in sub-sections (2) and (2A), which deal with losses — and the proposition that a fund's business income is taxed at fund level and does not pass through rests on clauses (23FBA) and (23FBB) of section 10, which were not read this pass and are not quoted here. It arises in Charitable Trusts & Exemption, Capital Gains Exemptions, How Tax Law Is Read, Assessment & Scrutiny and Capital Gains matters, on section 115UB, section 10(23FBA), section 10(23FBB), section 194LBB, section 115U, section 10(23FB) 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. For a Category I or II fund, take the Form 64C the unit holder receives and the Form 64D the fund files under sub-section (7) read with rule 12CB, and offer each stream in the unit holder's return in the character the fund earned it. Check whether any part of the fund's income falls under the head profits and gains of business or profession; that part is taxed at fund level and does not pass through, and where the fund is a trust it is taxed there at the maximum marginal rate under sub-section (4)(ii). Where an Assessing Officer proposes to re-characterise investment income as business income, insist on a specific show-cause notice on that head and on the ordinary badges-of-trade analysis — treatment in the books, frequency, holding period, source of funds — before the pass-through is disturbed. Where the assessee is a scheme rather than the registering trust, put Explanation 1(c) on the record: the Act itself contemplates a 'scheme of the investment fund', and the private placement memorandum and trust deed showing the scheme was floated under the registered trust are the primary evidence. Do not overlook sub-section (6): income retained at fund level is deemed credited to the unit holder on the last day of the previous year, so a return that offers only what was actually received is short.
Still good law. The text was read in full on the department's section 115UB page carrying the current 'Year: 2026' stamp and the correct heading and Act name. The Chennai Tribunal, in DCIT v. Sundaram Alternative Opportunities Series High Yield Secured Debt Fund (ITA Nos. 3532 and 3533/Chny/2025, pronounced 1 June 2026), states the same scheme at its paragraph 12, and section 194LBB (read on a page stamped Year 2025) cross-refers to 'an investment fund specified in clause (a) of the Explanation 1 to section 115UB', confirming that definition is the operative gate. Later treatment of the section by any court was not checked beyond the two Tribunal orders read this pass. 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.
The whole text of section 115UB was read from the department's page for that section carrying a 'Year:' stamp of 2026 and printing the heading 'Tax on income of investment fund and its unit holders' and the Act name 'Income-tax Act, 1961'. The commencement was read from a separate archived page stamped Year 2016 carrying footnote 29: 'Chapter XII-FB, consisting of section 115UB, inserted by the Finance Act, 2015, w.e.f. 1-4-2016.' Two limits. (1) The words of sections 10(23FBA) and 10(23FBB) were NOT read this pass — every fetch of the department's section 10 page truncated inside clause (12D) or clause (23C) and no other authoritative full text was reached. What those clauses do is stated here only as the Chennai Tribunal states it at paragraph 12 of DCIT v. Sundaram Alternative Opportunities Series High Yield Secured Debt Fund and as the Revenue's own grounds in that appeal describe clause (23FBA); do not quote either clause from this entry. (2) The proposition that a Category III AIF is outside section 115UB is drawn from Explanation 1(a), which admits only a Category I or Category II registration, and not from any provision expressly excluding Category III; what law then applies to a Category III fund was not researched this pass. (3) Section 115UB does not itself carve business income out of the pass-through. Asked whether the words "profits and gains of business or profession" appear anywhere in the section, the department's page returned exactly two places — sub-section (2)(i) and sub-section (2A) — and both concern losses. Everything this entry says about the fund's business income being taxed at fund level is taken from section 194LBB, which excludes "that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10", and from the Chennai Tribunal's statement at paragraph 12 of DCIT v. Sundaram Alternative Opportunities — not from the text of section 115UB. (4) Read Explanation 1(a) as a single sentence: the Category I or Category II certificate of registration is required in both limbs, and the words "or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022" supply an alternative regulator, not an alternative to that certificate. An IFSC fund management scheme without a Category I or II certificate is not an "investment fund" for this section. (5) The date in `decided_on` is the date on which Chapter XII-FB, consisting of section 115UB, came into force — 1 April 2016 — and not a decision date; this is a statutory entry and there is no decision behind it. 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. Section 115UB applies only to a fund which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the International Financial Services Centres Authority (Fund Management) Regulations, 2022, so a Category III Alternative Investment Fund falls outside Explanation 1(a) and outside the Chapter. Within such a fund, sub-section (1) charges income accruing to a unit holder out of investments made in the fund as if he had made the investments directly; sub-section (3) preserves its nature and proportion; sub-section (6) deems income not paid or credited to have been credited to him on the last day of the previous year; and sub-section (4) charges the fund's own total income 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. Section 115UB itself contains no carve-out of business income from the pass-through — the words "Profits and gains of business or profession" appear in the section only in sub-sections (2) and (2A), which deal with losses — and the proposition that a fund's business income is taxed at fund level and does not pass through rests on clauses (23FBA) and (23FBB) of section 10, which were not read this pass and are not quoted here.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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