Our InvIT is about to distribute. At what rate do we deduct for a resident unit holder, and does it change for a foreign investor or where the SPV is on the concessional corporate rate?
Section 194LBA sets three different obligations. For a resident unit holder the rate is ten per cent on distributed income of the nature referred to in clause (23FC) or clause (23FCA) of section 10; for a non-resident (not being a company) or a foreign company the rate on clause (23FC) income is five per cent for sub-clause (a) income and ten per cent for sub-clause (b) income, and on clause (23FCA) income it is the rates in force; and sub-section (2A) disapplies sub-sections (1) and (2) altogether in respect of sub-clause (b) income where the special purpose vehicle has not exercised the option under section 115BAA.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2014-10-01, reported as Section 194LBA of the Income-tax Act, 1961, inserted by the Finance (No. 2) Act, 2014 (Act No. 25 of 2014) with effect from 1 October 2014, as amended up to 2026. It bears on section 194LBA, section 115UA, section 10(23FC), section 10(23FCA), section 115BAA, section 2(13A) of the Income Tax Act 1961, in TDS Defaults, Charitable Trusts & Exemption, Capital Gains Exemptions and How Tax Law Is Read matters.
Three practical traps live in this section. The first is that the resident rate in sub-section (1) covers both clause (23FC) and clause (23FCA), so interest, dividend and rent to a resident all attract the same ten per cent — whereas for a non-resident the section splits the three streams across two sub-sections at three different rates. The second is sub-section (2A), which is easy to miss: where the SPV has NOT opted into the concessional corporate regime in section 115BAA, no deduction at all is to be made under sub-sections (1) or (2) from the sub-clause (b) stream, so a trust that deducts anyway has withheld without authority and the unit holder is left chasing a refund. The third is that for a non-resident the rate on section 10(23FCA) rental income is 'the rates in force', which imports the Finance Act rate and any treaty rate available under section 90 — so the deductor must collect a tax residency certificate and Form 10F before the payment, not after. Note that the section is a machinery provision only: it does not decide chargeability, which is governed by section 115UA read with the section 10 clauses, and a sum falling in section 56(2)(xii) is not distributed income 'referred to in section 115UA' of the kind this section describes.
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 194LBA, headed 'Certain income from units of a business trust', now reads in four parts. Sub-section (1) requires the person responsible for making the payment, at the time of credit or payment whichever is earlier, to deduct income-tax at ten per cent where distributed income referred to in section 115UA, being of the nature referred to in clause (23FC) or clause (23FCA) of section 10, is payable by a business trust to a resident unit holder. Sub-section (2) applies where such income of the nature referred to in clause (23FC) is payable to a unit holder being a non-resident (not being a company) or a foreign company, and requires deduction 'at the rate of five per cent in case of income of the nature referred to in sub-clause (a) and ten per cent in case of income of the nature referred to in sub-clause (b), of the said clause'. Sub-section (2A) provides that nothing contained in sub-sections (1) and (2) shall apply in respect of income of the nature referred to in sub-clause (b) of clause (23FC) of section 10 if the special purpose vehicle referred to in the said clause has not exercised the option under section 115BAA. Sub-section (3) applies where distributed income of the nature referred to in clause (23FCA) of section 10 is payable to a non-resident (not being a company) or a foreign company and requires deduction at the rates in force.
Statutory position — no holding is asserted; this entry reproduces statutory text. A business trust deducts at ten per cent from a resident unit holder on both the section 10(23FC) and the section 10(23FCA) streams; from a non-resident individual or foreign company it deducts five per cent on section 10(23FC) sub-clause (a) income, ten per cent on sub-clause (b) income and the rates in force on section 10(23FCA) income; and it deducts nothing under sub-sections (1) or (2) on sub-clause (b) income where the special purpose vehicle has not exercised the section 115BAA option.
The section is deliberately keyed to the same two clauses of section 10 as the charge in section 115UA(3), so that withholding and chargeability move together and the trust is not made to deduct on a stream that is not taxable in the unit holder's hands. The split of rates by residence follows the ordinary pattern of Chapter XVII-B — a fixed domestic rate, a concessional fixed rate on interest to non-residents, and 'the rates in force' where the income is of a kind for which the Finance Act and the treaties supply the rate. Sub-section (2A) exists because the sub-clause (b) stream is dividend routed up from the special purpose vehicle: where the SPV has stayed outside the section 115BAA concessional regime, the dividend has already borne full corporate tax at SPV level, and the sub-section removes the withholding obligation on that stream rather than leaving the unit holder to reclaim.
(2A) Nothing contained in sub-sections (1) and (2) shall apply in respect of income of the nature referred to in sub-clause (b) of clause (23FC) of section 10, if the special purpose vehicle referred to in the said clause has not exercised the option under section 115BAA.
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Handle my notice → Ask a CA on WhatsAppSection 194LBA sets three different obligations. For a resident unit holder the rate is ten per cent on distributed income of the nature referred to in clause (23FC) or clause (23FCA) of section 10; for a non-resident (not being a company) or a foreign company the rate on clause (23FC) income is five per cent for sub-clause (a) income and ten per cent for sub-clause (b) income, and on clause (23FCA) income it is the rates in force; and sub-section (2A) disapplies sub-sections (1) and (2) altogether in respect of sub-clause (b) income where the special purpose vehicle has not exercised the option under section 115BAA. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 194LBA, section 115UA, section 10(23FC), section 10(23FCA), section 115BAA, section 2(13A) of the Income Tax Act 1961. It is reported as Section 194LBA of the Income-tax Act, 1961, inserted by the Finance (No. 2) Act, 2014 (Act No. 25 of 2014) with effect from 1 October 2014, as amended up to 2026. Three practical traps live in this section. The first is that the resident rate in sub-section (1) covers both clause (23FC) and clause (23FCA), so interest, dividend and rent to a resident all attract the same ten per cent — whereas for a non-resident the section splits the three streams across two sub-sections at three different rates. The second is sub-section (2A), which is easy to miss: where the SPV has NOT opted into the concessional corporate regime in section 115BAA, no deduction at all is to be made under sub-sections (1) or (2) from the sub-clause (b) stream, so a trust that deducts anyway has withheld without authority and the unit holder is left chasing a refund. The third is that for a non-resident the rate on section 10(23FCA) rental income is 'the rates in force', which imports the Finance Act rate and any treaty rate available under section 90 — so the deductor must collect a tax residency certificate and Form 10F before the payment, not after. Note that the section is a machinery provision only: it does not decide chargeability, which is governed by section 115UA read with the section 10 clauses, and a sum falling in section 56(2)(xii) is not distributed income 'referred to in section 115UA' of the kind this section describes. If it applies to you, the first step is this: Classify each stream of the distribution before fixing a rate: section 10(23FC) sub-clause (a), section 10(23FC) sub-clause (b), section 10(23FCA), and residue. The residue is not covered by section 194LBA at all.
Section 194LBA, headed 'Certain income from units of a business trust', now reads in four parts. Sub-section (1) requires the person responsible for making the payment, at the time of credit or payment whichever is earlier, to deduct income-tax at ten per cent where distributed income referred to in section 115UA, being of the nature referred to in clause (23FC) or clause (23FCA) of section 10, is payable by a business trust to a resident unit holder. Sub-section (2) applies where such income of the nature referred to in clause (23FC) is payable to a unit holder being a non-resident (not being a company) or a foreign company, and requires deduction 'at the rate of five per cent in case of income of the nature referred to in sub-clause (a) and ten per cent in case of income of the nature referred to in sub-clause (b), of the said clause'. Sub-section (2A) provides that nothing contained in sub-sections (1) and (2) shall apply in respect of income of the nature referred to in sub-clause (b) of clause (23FC) of section 10 if the special purpose vehicle referred to in the said clause has not exercised the option under section 115BAA. Sub-section (3) applies where distributed income of the nature referred to in clause (23FCA) of section 10 is payable to a non-resident (not being a company) or a foreign company and requires deduction at the rates in force. The matter was decided on 2014-10-01 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. A business trust deducts at ten per cent from a resident unit holder on both the section 10(23FC) and the section 10(23FCA) streams; from a non-resident individual or foreign company it deducts five per cent on section 10(23FC) sub-clause (a) income, ten per cent on sub-clause (b) income and the rates in force on section 10(23FCA) income; and it deducts nothing under sub-sections (1) or (2) on sub-clause (b) income where the special purpose vehicle has not exercised the section 115BAA option.
The section is deliberately keyed to the same two clauses of section 10 as the charge in section 115UA(3), so that withholding and chargeability move together and the trust is not made to deduct on a stream that is not taxable in the unit holder's hands. The split of rates by residence follows the ordinary pattern of Chapter XVII-B — a fixed domestic rate, a concessional fixed rate on interest to non-residents, and 'the rates in force' where the income is of a kind for which the Finance Act and the treaties supply the rate. Sub-section (2A) exists because the sub-clause (b) stream is dividend routed up from the special purpose vehicle: where the SPV has stayed outside the section 115BAA concessional regime, the dividend has already borne full corporate tax at SPV level, and the sub-section removes the withholding obligation on that stream rather than leaving the unit holder to reclaim. In the words reproduced by the source cited on this page: "(2A) Nothing contained in sub-sections (1) and (2) shall apply in respect of income of the nature referred to in sub-clause (b) of clause (23FC) of section 10, if the special purpose vehicle referred to in the said clause has not exercised the option under section 115BAA."
It was decided by the CBDT Circulars & Instructions on 2014-10-01 and is reported as Section 194LBA of the Income-tax Act, 1961, inserted by the Finance (No. 2) Act, 2014 (Act No. 25 of 2014) with effect from 1 October 2014, as amended up to 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 194LBA, section 115UA, section 10(23FC), section 10(23FCA), section 115BAA, section 2(13A), 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. A business trust deducts at ten per cent from a resident unit holder on both the section 10(23FC) and the section 10(23FCA) streams; from a non-resident individual or foreign company it deducts five per cent on section 10(23FC) sub-clause (a) income, ten per cent on sub-clause (b) income and the rates in force on section 10(23FCA) income; and it deducts nothing under sub-sections (1) or (2) on sub-clause (b) income where the special purpose vehicle has not exercised the section 115BAA option. It arises in TDS Defaults, Charitable Trusts & Exemption, Capital Gains Exemptions and How Tax Law Is Read matters, on section 194LBA, section 115UA, section 10(23FC), section 10(23FCA), section 115BAA, section 2(13A) 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 every resident unit holder, deduct ten per cent under sub-section (1) on the section 10(23FC) and section 10(23FCA) streams. For a non-resident individual or a foreign company, deduct five per cent on sub-clause (a) income and ten per cent on sub-clause (b) income under sub-section (2), and the rates in force on section 10(23FCA) rental income under sub-section (3). Before deducting anything on the sub-clause (b) stream, obtain written confirmation from the SPV whether it has exercised the section 115BAA option; if it has not, sub-section (2A) means no deduction is to be made under sub-sections (1) or (2) on that stream. Where 'rates in force' applies, collect the tax residency certificate and Form 10F and apply the treaty rate at the time of deduction rather than paying gross and inviting a refund claim. Do not read the rates off an old consolidation of section 194LBA — the 2014 text knows nothing of clause (23FCA), of sub-section (2A) or of sub-section (3), and shows a flat five per cent for every non-resident.
Still good law. The text quoted here is printed in identical words in two consolidations of the section, both under the heading 'Certain income from units of a business trust' and both naming the Income-tax Act, 1961. The 2014 text of the section, used only to date the section's insertion, carries the earlier and materially different wording and must not be used to state rates. The footnote block on the current text is not set out here, so the amending Act for sub-sections (2A) and (3) is not verified, and later treatment of the section is not established. Before deducting, settle two things for your own case: whether the stream is section 10(23FC) sub-clause (a) or (b) income or section 10(23FCA) income, and whether the special purpose vehicle has exercised the section 115BAA option, because sub-section (2A) turns on that second question alone. 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.
There are two materially different texts of section 194LBA in circulation and it matters which one you are reading. The older one confines sub-section (1) to 'sub-clause (a) of clause (23FC)', carries a flat five per cent in sub-section (2), and has no sub-section (2A) at all. The current one carries the text quoted here. If the version you have shows a flat five per cent for every non-resident, it is the old text. The footnote block on the current text is not set out here, so the amending Act and effective date for sub-sections (2A) and (3) are not established in this entry; the commencement date given for the section as a whole, 1 October 2014, comes from the footnote 'Inserted by the Finance (No. 2) Act, 2014, w.e.f. 1-10-2014.' The words of sections 10(23FC) and 10(23FCA) themselves are not set out either, so the description of what each stream contains is drawn from the wording of section 194LBA itself and from section 115UA. 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. A business trust deducts at ten per cent from a resident unit holder on both the section 10(23FC) and the section 10(23FCA) streams; from a non-resident individual or foreign company it deducts five per cent on section 10(23FC) sub-clause (a) income, ten per cent on sub-clause (b) income and the rates in force on section 10(23FCA) income; and it deducts nothing under sub-sections (1) or (2) on sub-clause (b) income where the special purpose vehicle has not exercised the section 115BAA option.
TaxSphere, “Statutory position — section 194LBA: the three withholding rates on a business trust distribution, and the section 115BAA switch in sub-section (2A)”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-194lba-withholding-on-reit-and-invit-distributions/ (validity last checked 2026-09-08)
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