I hold units in a Category II AIF. What is taxed in the fund's hands, what is taxed in mine, and what do I do with the Form 64C it sends me?
Section 115UB taxes the unit holder of a Category I or Category II AIF on his share of the fund's income as if he had made the investment directly, and the character of the income is preserved. The exception is business income: s.10(23FBA) leaves it in the fund, s.115UB(4) taxes it there at the maximum marginal rate for a fund that is not a company or a firm, and s.10(23FBB) exempts the unit holder's share of it. Losses do not pass through except a non-business loss on a unit held for at least twelve months; a business loss stays in the fund. TDS is ten per cent under s.194LBB for a resident, and the fund reports on Form 64C to you by 30 June and Form 64D to the department by 15 June.
Chapter XII-FB is short and it does one thing: it makes a Category I or Category II Alternative Investment Fund transparent for everything except its business income, and leaves the business income to be taxed in the fund.
Section 115UB(1) opens "Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this Chapter," and then provides that "any income accruing or arising to, or received by, a person, being 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 the income accruing or arising to, or received by, such person had the investments made by the investment fund been made directly by him." The whole of the pass-through follows from those last eight words. The section was inserted by the Finance Act 2015 with effect from 1 April 2016, so it applies from assessment year 2016-17.
"Investment fund" is defined in Explanation 1(a), and the definition is narrower than the phrase suggests: "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)". Two things to take from it. The fund has to be established or incorporated in India, and the registration has to be as a Category I or a Category II AIF — the second limb of the definition, added for funds regulated under the IFSCA Fund Management Regulations 2022, extends the same treatment to a GIFT City fund but does not widen the categories. A "unit" is "beneficial interest of an investor in the investment fund or a scheme of the investment fund and shall include shares or partnership interests", so an LLP interest is a unit for this purpose.
The carve-out that drives every structuring conversation is the business income. Section 10(23FBA) exempts, in the fund's hands, "any income of an investment fund other than the income chargeable under the head 'Profits and gains of business or profession'" — so everything except business income drops out of the fund's assessment. Section 10(23FBB) exempts, in the unit holder's hands, "any income referred to in section 115UB, accruing or arising to, or received by, a unit holder of an investment fund, being that proportion of income which is of the same nature as income chargeable under the head 'Profits and gains of business or profession'." Both clauses were inserted by the Finance Act 2015 with effect from 1 April 2016. Read together they draw a clean line: non-business income is out of the fund and into the unit holder; business income is in the fund and out of the unit holder.
And it is taxed there heavily. Section 115UB(4): "The total income of the investment fund shall be charged to tax— (i) at the rate or rates as specified in the Finance Act of the relevant year, where such fund is a company or a firm; or (ii) at maximum marginal rate in any other case." Most AIFs are trusts, so most business income of an AIF is taxed at the maximum marginal rate at the fund level, with no ability to push it down to an investor who might be taxed lower or not at all — a tax-exempt or loss-making investor gets no benefit from it, and a non-resident investor cannot take it to a treaty. That single sentence is why sponsors work hard to characterise fund income as capital gains rather than business income, why the objects clause and the holding period matter more here than they do elsewhere, and why a fund that trades rather than invests can find its economics inverted.
The character of everything that does pass through is preserved. Section 115UB(3): "The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1), as if it had been received by, or had accrued or arisen to, the investment fund during the previous year subject to the provisions of sub-section (2)." So the fund's long-term capital gain is the unit holder's long-term capital gain, at his rate and with his exemptions; the fund's interest is his interest. And there is no waiting for a distribution: sub-section (6) deems income accruing to the fund and not paid or credited during the year "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." An investor is therefore taxed on his share whether or not any money has moved.
Losses do not travel the same way, and this is where the pass-through stops being symmetrical. Sub-section (2) applies where the net result of the computation of the fund's total income, computed without giving effect to s.10(23FBA), is a loss under any head that cannot be set off against income under another head in that year. Of that loss, the part arising under "Profits and gains of business or profession" is "allowed to be carried forward and it shall be set off by the investment fund in accordance with the provisions of Chapter VI" and is "ignored for the purposes of sub-section (1)" — it stays in the fund. And the loss other than that "shall also be ignored for the purposes of sub-section (1), if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of atleast twelve months." So a non-business loss does pass through, but only where the unit has been held for at least twelve months; hold the unit for less and the loss is lost to both — it does not go to the unit holder and, on the words of the clause, it is not given to the fund either. There is a one-off transitional rule in sub-section (2A): a non-business loss accumulated at the fund level as on 31 March 2019 is deemed to be the loss of a unit holder who held the unit on that date, carried forward by him "for the remaining period calculated from the year in which the loss had occurred for the first time taking that year as the first year". That is a closed historical window, not a general rule.
Withholding is s.194LBB, and the reason the credit rarely lines up with the tax finally payable is visible on the face of the section. It applies to "any income, other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10" — that is, everything except the business-income share, which is not the unit holder's income at all. The rate, as substituted by Act 28 of 2016 with effect from 1 June 2016, is "(i) at the rate of ten per cent, where the payee is a resident; (ii) at the rates in force, where the payee is a non-resident (not being a company) or a foreign company", with a proviso that for a non-resident payee "no deduction shall be made in respect of any income that is not chargeable to tax under the provisions of the Act." The section was originally inserted with effect from 1 June 2015 at a flat ten per cent. Three mismatches follow. Ten per cent is deducted on the gross amount whatever its character, so a distribution that is in the unit holder's hands a long-term capital gain, a dividend or interest all suffer the same ten per cent and none of the three is finally taxed at ten per cent. Deduction happens on credit or payment, while s.115UB(6) taxes the unit holder on undistributed income at year end — so the income can be assessed in one year and the credit arise in another. And nothing is deducted on the business-income share because it is not his income, though the fund has already paid tax on it at the maximum marginal rate. Expect the investor's advance tax to be driven by Form 64C and not by the deduction.
Form 64C is the statement the unit holder gets. Section 115UB(7) requires the person crediting or paying the income, and the fund, to furnish a statement "to the person who is liable to tax in respect of such income and to the prescribed income-tax authority". Rule 12CB does the prescribing. The statement to the unit holder is Form No. 64C — headed "Statement of income distributed by an investment fund to be provided to the unit holder under section 115UB of the Income-tax Act, 1961" — furnished by 30 June of the financial year following the previous year in which the income was paid or credited, and generated from the web portal specified by the Principal Director General or Director General of Income-tax (Systems). The statement to the department is Form No. 64D, furnished electronically under digital signature and verified by an accountant to the Principal Commissioner or Commissioner within whose jurisdiction the principal office of the fund is situated, by 15 June of that following financial year.
Form 64C is built for the pass-through, which is what makes it usable for the return. It reports the unit holder's share broken up by character: income or loss from business or profession, long-term capital gain and short-term capital gain each split by the applicable rate code, dividend including income taxed at special rates, and other sources, with a separate item for the deemed loss as on 31 March 2019 under s.115UB(2A) split between long-term and short-term. Schedule PTI in the return is the schedule for pass-through income from a business trust or an investment fund, and it is filled from those rows: the character and the rate code in Form 64C decide which line of Schedule PTI the amount goes on and which capital gains or other-sources schedule it then feeds. The business-income row is reported but not taxed again in the unit holder's hands, because s.10(23FBB) exempts it.
One more point on the fund's own status: sub-section (5) provides that "The provisions of Chapter XII-D or Chapter XII-E shall not apply to the income paid by an investment fund under this Chapter", so there is no dividend distribution tax or income distribution tax layered on top of the pass-through.
A Category III AIF is outside all of this. The definition in Explanation 1(a) is confined to a fund registered as a Category I or Category II AIF, so a Category III fund is not an "investment fund" for Chapter XII-FB: s.115UB does not apply to it, s.10(23FBA) does not exempt its income and s.194LBB does not apply to a payment by it. What is taxed instead, and in whose hands, was not established from any page fetched for this entry, and nothing is asserted about it here.
On the Income-tax Act, 2025, the department's navigator maps s.115UB of the 1961 Act to s.224, s.10(23FBA) to Schedule V (Table serial number 1), s.10(23FBB) to Schedule V (Table serial number 2), and s.194LBB to the tables in s.393(1) at serial number 4(iii), s.393(2) at serial number 8 and s.393(4) at serial number 14. The text of those provisions was not fetched, so nothing is said here about whether the twelve-month loss condition or the maximum marginal rate on business income is carried over in the same terms.
Two features drive everything an adviser does here. The business-income carve-out means the characterisation of the fund's own gains is worth the maximum marginal rate to every investor, exempt or not, resident or not — which is why the fund's objects, holding periods and trading pattern get the attention they do. And the ten per cent deduction under s.194LBB is a poor proxy for the tax finally payable, so an investor who plans his advance tax from Form 26AS rather than from Form 64C will be short, and will pay s.234B and s.234C interest on the difference.
The Assessing Officer has re-characterised my Category II AIF's interest, gains and processing fees as business income and denied the section 10(23FBA) exemption on the whole lot. What is the answer?
The Assessing Officer says my AIF scheme has its own PAN but no SEBI registration of its own, so it is not an 'investment fund' and section 10(23FBA) is gone. Is that right?
Our fund is a SEBI-registered AIF trust that offers the whole of its income as a representative assessee. Part of the year's advance tax and TDS went in under the beneficiaries' PANs and part under the fund's own. The CPC has refused the beneficiary-PAN credits. Can the fund claim them?
The Commissioner (Appeals) has directed the Assessing Officer to allow my fund's section 10(23FB) exemption only if it proves it is not an investment fund under Explanation 1 to section 115UB, without ever hearing us. Has anyone decided whether a SEBI venture capital fund registered under the 1996 Regulations is inside section 115UB?
Our REIT has to give unit holders a statement of distributed income and file one with the department. Which form goes where, by when, and is the machinery the same for an Alternative Investment Fund?
The Assessing Officer has re-labelled my Category II AIF's interest and gains as business income. Which provision actually decides whether income is taxed in the fund's hands or in the investor's, because section 115UB does not say so in terms?
My client is a fund registered with SEBI as a venture capital fund. Is it still on the old section 115U pass-through, or has it been moved to section 115UB, and what turns on the answer?
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?
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