My client's InvIT distributes most of its payout as 'repayment of debt' and the annual statement shows it as a return of capital. Is that still tax-free?
No, not for distributions falling in the previous year 2023-24 or later. The Finance Act 2023 inserted clause (xii) in section 56(2) with effect from 1 April 2024, so a 'specified sum' received by a unit holder from a business trust is chargeable as income from other sources, and the Explanation defines the specified sum by the formula A minus B minus C — the cumulative distributions to that unit which are neither income referred to in section 10(23FC) or 10(23FCA) nor chargeable under section 115UA(2), less the amount at which the unit was issued by the trust, less anything already taxed under the clause in an earlier year.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2024-04-01, reported as Finance Act, 2023 (Act No. 8 of 2023); clause (xii) of section 56(2) and sub-section (3A) of section 115UA both inserted with effect from 1 April 2024 (assessment year 2024-25). It bears on section 56(2)(xii), section 115UA, section 115UA(3A), section 10(23FC), section 10(23FCA), section 2(13A) of the Income Tax Act 1961, in Charitable Trusts & Exemption, Capital Gains Exemptions, Capital Gains and How Tax Law Is Read matters.
This is the provision that closed the repayment-of-debt route. Until AY 2024-25 a REIT or InvIT could route a large part of its distribution through the special purpose vehicle as repayment of shareholder debt, which was neither interest nor dividend nor rent, and therefore fell outside section 10(23FC), outside section 10(23FCA) and outside the section 115UA(2) charge in the trust's hands — so nobody paid tax on it. Four features of the enacted clause decide most live disputes. First, it operates cumulatively and per unit: A takes in sums distributed 'during the previous year or during any earlier previous year or years', and takes in sums paid to any earlier holder of that unit, so a purchaser in the secondary market inherits the distribution history attached to his unit. Second, the deduction B is the amount at which the unit was ISSUED by the trust, not what the investor paid for it, so a unit bought above issue price gets no relief for the excess under this clause. Third, the specified sum is deemed to be zero if B plus C exceeds A, so there is a running balance to be tracked, not a year-by-year computation. Fourth, section 115UA(3A) switches off the character-retention rule in section 115UA(1) for this sum, which means it is taxed as income from other sources and not as interest, dividend or rent. Note also that the clause as enacted is materially more favourable than the clause proposed: the Finance Bill 2023 as introduced taxed the whole sum, with a reduction only for the cost of acquisition on redemption of the unit.
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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With effect from 1 April 2024 the Finance Act 2023 inserted clause (xii) after clause (xi) in sub-section (2) of section 56, together with an Explanation defining the expression 'specified sum'. The department's section 56 page stamped Year 2025 prints the clause as: '(xii) any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year.' The Explanation provides that the specified sum is to be computed as A minus B minus C, deemed to be zero if the sum of B and C is greater than A, where A is the aggregate of sums distributed by the business trust with respect to such unit during the previous year or any earlier previous year or years, to the unit holder holding the unit on the date of distribution or to any other unit holder who held that unit at any time prior to the distribution, which is (a) not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10 and (b) not chargeable to tax under sub-section (2) of section 115UA; B is the amount at which such unit was issued by the business trust; and C is the amount charged to tax under the clause in any earlier previous year. The same Act inserted sub-section (3A) in section 115UA, which disapplies the character-retention rule in section 115UA(1) to any sum referred to in section 56(2)(xii).
Statutory position — no holding is asserted; this entry reproduces statutory text. From 1 April 2024, a distribution by a REIT or InvIT to a unit holder which is neither income of the nature described in section 10(23FC) or section 10(23FCA) nor chargeable in the trust's hands under section 115UA(2) is chargeable in the unit holder's hands as income from other sources, but only to the extent that the cumulative amount of such distributions on that unit exceeds the sum of the unit's issue price and the amount already charged under the clause in earlier years.
The mechanism is entirely textual and there is no judicial gloss on it. The clause is drafted by reference to the residue: it captures only what falls outside the two exemption clauses (10(23FC) and 10(23FCA)) and outside the maximum-marginal-rate charge on the trust in section 115UA(2), which is precisely the space in which the repayment-of-debt distribution sat. The A-B-C formula is a capital-recovery mechanic rather than a charge on the gross receipt: by allowing B, the issue price of the unit, as a running deduction, the clause taxes only the excess of cumulative non-taxed distributions over what the investor put in at issue, and by allowing C it prevents the same excess being taxed twice. The consequential insertion of section 115UA(3A) is necessary because section 115UA(1) would otherwise have deemed the sum to retain in the unit holder's hands the character it had in the trust's; sub-section (3A) removes that deeming so that the sum is charged under section 56 as income from other sources.
(xii) any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year.
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Handle my notice → Ask a CA on WhatsAppNo, not for distributions falling in the previous year 2023-24 or later. The Finance Act 2023 inserted clause (xii) in section 56(2) with effect from 1 April 2024, so a 'specified sum' received by a unit holder from a business trust is chargeable as income from other sources, and the Explanation defines the specified sum by the formula A minus B minus C — the cumulative distributions to that unit which are neither income referred to in section 10(23FC) or 10(23FCA) nor chargeable under section 115UA(2), less the amount at which the unit was issued by the trust, less anything already taxed under the clause in an earlier year. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 56(2)(xii), section 115UA, section 115UA(3A), section 10(23FC), section 10(23FCA), section 2(13A) of the Income Tax Act 1961. It is reported as Finance Act, 2023 (Act No. 8 of 2023); clause (xii) of section 56(2) and sub-section (3A) of section 115UA both inserted with effect from 1 April 2024 (assessment year 2024-25). This is the provision that closed the repayment-of-debt route. Until AY 2024-25 a REIT or InvIT could route a large part of its distribution through the special purpose vehicle as repayment of shareholder debt, which was neither interest nor dividend nor rent, and therefore fell outside section 10(23FC), outside section 10(23FCA) and outside the section 115UA(2) charge in the trust's hands — so nobody paid tax on it. Four features of the enacted clause decide most live disputes. First, it operates cumulatively and per unit: A takes in sums distributed 'during the previous year or during any earlier previous year or years', and takes in sums paid to any earlier holder of that unit, so a purchaser in the secondary market inherits the distribution history attached to his unit. Second, the deduction B is the amount at which the unit was ISSUED by the trust, not what the investor paid for it, so a unit bought above issue price gets no relief for the excess under this clause. Third, the specified sum is deemed to be zero if B plus C exceeds A, so there is a running balance to be tracked, not a year-by-year computation. Fourth, section 115UA(3A) switches off the character-retention rule in section 115UA(1) for this sum, which means it is taxed as income from other sources and not as interest, dividend or rent. Note also that the clause as enacted is materially more favourable than the clause proposed: the Finance Bill 2023 as introduced taxed the whole sum, with a reduction only for the cost of acquisition on redemption of the unit. If it applies to you, the first step is this: Get the trust's annual statement in Form 64B and separate the distribution into its four buckets — section 10(23FC)(a) interest, section 10(23FC)(b) dividend, section 10(23FCA) rent, and everything else. Only the last bucket enters A.
With effect from 1 April 2024 the Finance Act 2023 inserted clause (xii) after clause (xi) in sub-section (2) of section 56, together with an Explanation defining the expression 'specified sum'. The department's section 56 page stamped Year 2025 prints the clause as: '(xii) any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year.' The Explanation provides that the specified sum is to be computed as A minus B minus C, deemed to be zero if the sum of B and C is greater than A, where A is the aggregate of sums distributed by the business trust with respect to such unit during the previous year or any earlier previous year or years, to the unit holder holding the unit on the date of distribution or to any other unit holder who held that unit at any time prior to the distribution, which is (a) not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10 and (b) not chargeable to tax under sub-section (2) of section 115UA; B is the amount at which such unit was issued by the business trust; and C is the amount charged to tax under the clause in any earlier previous year. The same Act inserted sub-section (3A) in section 115UA, which disapplies the character-retention rule in section 115UA(1) to any sum referred to in section 56(2)(xii). The matter was decided on 2024-04-01 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. From 1 April 2024, a distribution by a REIT or InvIT to a unit holder which is neither income of the nature described in section 10(23FC) or section 10(23FCA) nor chargeable in the trust's hands under section 115UA(2) is chargeable in the unit holder's hands as income from other sources, but only to the extent that the cumulative amount of such distributions on that unit exceeds the sum of the unit's issue price and the amount already charged under the clause in earlier years.
The mechanism is entirely textual and there is no judicial gloss on it. The clause is drafted by reference to the residue: it captures only what falls outside the two exemption clauses (10(23FC) and 10(23FCA)) and outside the maximum-marginal-rate charge on the trust in section 115UA(2), which is precisely the space in which the repayment-of-debt distribution sat. The A-B-C formula is a capital-recovery mechanic rather than a charge on the gross receipt: by allowing B, the issue price of the unit, as a running deduction, the clause taxes only the excess of cumulative non-taxed distributions over what the investor put in at issue, and by allowing C it prevents the same excess being taxed twice. The consequential insertion of section 115UA(3A) is necessary because section 115UA(1) would otherwise have deemed the sum to retain in the unit holder's hands the character it had in the trust's; sub-section (3A) removes that deeming so that the sum is charged under section 56 as income from other sources. In the words reproduced by the source cited on this page: "(xii) any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year."
It was decided by the CBDT Circulars & Instructions on 2024-04-01 and is reported as Finance Act, 2023 (Act No. 8 of 2023); clause (xii) of section 56(2) and sub-section (3A) of section 115UA both inserted with effect from 1 April 2024 (assessment year 2024-25). 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 56(2)(xii), section 115UA, section 115UA(3A), section 10(23FC), section 10(23FCA), 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. From 1 April 2024, a distribution by a REIT or InvIT to a unit holder which is neither income of the nature described in section 10(23FC) or section 10(23FCA) nor chargeable in the trust's hands under section 115UA(2) is chargeable in the unit holder's hands as income from other sources, but only to the extent that the cumulative amount of such distributions on that unit exceeds the sum of the unit's issue price and the amount already charged under the clause in earlier years. It arises in Charitable Trusts & Exemption, Capital Gains Exemptions, Capital Gains and How Tax Law Is Read matters, on section 56(2)(xii), section 115UA, section 115UA(3A), section 10(23FC), section 10(23FCA), 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. Build a running per-unit ledger from the date the unit was issued: cumulative 'everything else' distributions (A), the issue price of the unit (B), and the amounts already offered under section 56(2)(xii) in earlier years (C). Carry that ledger forward year on year. Where the client bought the units on the exchange rather than in the issue, use the trust's ISSUE price as B, not his purchase price, and warn him that the deduction is therefore smaller than his actual cost. Where B plus C exceeds A, return the specified sum as nil for the year and carry the ledger forward — do not report a negative figure or set it off. Offer the specified sum under the head income from other sources; do not treat it as interest or as dividend, because section 115UA(3A) expressly disapplies the character-retention rule in section 115UA(1) to it. For any distribution falling in previous year 2022-23 or earlier, the clause has no application at all — its effect is from 1 April 2024, that is, from assessment year 2024-25.
Still good law. This is the amending law itself, not a decision about it. The full text of clause (xii) with its Explanation, and the commencement footnote attributing it to Act No. 8 of 2023 with effect from 1 April 2024, were read from the department's section 56 page stamped Year 2025 (heading 'Income from other sources'); the presence of clause (xii) in the same terms was independently confirmed on the department's section 56 page stamped Year 2024 (No. 1). The consequential section 115UA(3A) was read on three separate departmental section 115UA pages stamped Year 2023, Year 2024 (No. 1) and Year 2024 (No. 2), the last carrying the footnote 'Ins. by the Act No. 8 of 2023, w.e.f. 1-4-2024.' No decision applying section 56(2)(xii) was located: an Indian Kanoon search for a specified sum received by a unit holder of a business trust returned nil judgments. No later amendment to the clause was found. The department's section 56 pages stamped Year 2025 and Year 2024 (No. 1) print clause (xii) in identical words, and the cognate provision of the Income Tax Act, 2025 reproduces the same A-B-C formula, but no departmental section 56 page stamped Year 2026 was reached, so a Finance Act 2025 or 2026 change to the clause has not been ruled out. 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 enacted clause differs materially from the clause as introduced, and that difference matters when reading any commentary written between February and March 2023. The Finance Bill 2023 (Bill No. 17 of 2023), clause 32, as read on indiabudget.gov.in, would have inserted: "(xii) any sum received by a unit holder from a business trust which— (a) is not in the nature of income referred to in clause (23FC) or clause (23FCA) of section 10; and (b) is not chargeable to tax under sub-section (2) of section 115UA:", with a proviso reducing the sum by the cost of acquisition only where the receipt was for redemption of units. The clause finally enacted, as printed on the department's section 56 page stamped Year 2025, instead uses the words 'specified sum' with the A-B-C formula reproduced in this entry, which allows a deduction for the issue price of the unit against ALL distributions and not only redemptions. The consequential provision was narrowed in the same way. The Memorandum Explaining the Provisions in the Finance Bill, 2023 describes the proposal as an "insertion of sub-section (3A) in section 115UA of the Act to provide that the provisions of sub-sections (1), (2) and (3) of this section, shall not apply in respect of any sum, as referred to in clause (xii) of sub-section (2) of section 56". What was enacted disapplies sub-section (1) alone. Commentary describing the sum as falling outside sub-sections (2) and (3) as well is describing the Bill. The text in this entry is the enacted text. Two further points of caution. (1) The commencement footnote on that page reads '68. Clauses (xii) and (xiii) Ins. by Act No. 08 of 2023, w.e.f. 1-4-2024.' — the same footnote covers clause (xiii) on life insurance policies, which is a different subject and is not dealt with here. (2) The department's bare /w/section-56 page is an ARCHIVED page stamped Year 2009 that stops at clause (viii) and carries no clause (xii) at all; it must not be used to read this provision. An Indian Kanoon search for a decision on a specified sum received by a unit holder of a business trust returned no judgments, and none is to be expected yet given the 1 April 2024 commencement. The date in `decided_on` is the date from which clause (xii) of section 56(2) and the consequential section 115UA(3A) take effect — 1 April 2024, assessment year 2024-25 — 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. From 1 April 2024, a distribution by a REIT or InvIT to a unit holder which is neither income of the nature described in section 10(23FC) or section 10(23FCA) nor chargeable in the trust's hands under section 115UA(2) is chargeable in the unit holder's hands as income from other sources, but only to the extent that the cumulative amount of such distributions on that unit exceeds the sum of the unit's issue price and the amount already charged under the clause in earlier years.
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