Section 10(23FC)

Section 10(23FC) — the law in short

What the courts have decided on section 10(23FC), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Embassy Office Parks REIT v DCIT — a REIT cannot amortise its IPO expenses under section 35D(2)(c) because it is not a company ITATHelps departmentNo later treatment found
  Our REIT incurred large expenses on its initial public offer and listing. Can it write them off over ten years under section 35D like a listed company?
  No, on the Bangalore Tribunal's reasoning. Clause (c) of section 35D(2) opens with the words 'where the assessee is a company', and a SEBI-registered Real Estate Investment Trust constituted under the Indian Trusts Act 1882 is neither a company under the Companies Act 2013 nor a company within section 2(17) of the Income-tax Act, so the deduction is unavailable however closely the public issue of units resembles a public issue of shares. The Tribunal held those opening words to be a conscious legislative limitation and not surplusage, refused to read units as shares, and dismissed the appeal.
• Statutory position — s.194A: tax on interest other than interest on securities, with the threshold at ₹50,000 for a bank, co-operative bank or post office, ₹1,00,000 for a senior citizen and ₹10,000 in any other case — the 1961 Act position from 1 April 2025 to 31 March 2026 CBDT Circulars & InstructionsCuts both ways
  My bank has deducted tax on my fixed deposit interest and I was told the limit had gone up. My father is a senior citizen and his bank deducted too. There is also a loan I took from a friend on which I pay interest, and a co-operative society that pays me interest on a deposit. Who exactly has to deduct under section 194A, on what amount, and what are the limits as they stand now?
  Section 194A requires any person who is not an individual or a Hindu undivided family, and who pays a resident interest other than interest on securities, to deduct tax at the rates in force at the time of credit or payment, whichever is earlier. An individual or HUF is drawn in only by the proviso to sub-section (1), and only if total sales, gross receipts or turnover exceeded one crore rupees in business or fifty lakh rupees in profession in the preceding financial year. Section 194A(3)(i) sets the thresholds. From 1 April 2025 they are fifty thousand rupees where the payer is a banking company, a co-operative society carrying on banking business or a post office deposit scheme, one lakh rupees where the payee is a senior citizen, and ten thousand rupees in any other case — each figure substituted by Act No. 7 of 2025, the Finance Act, 2025. Section 194A(3) also carries the exclusions: interest paid to a banking company, a financial corporation, the Life Insurance Corporation, the Unit Trust of India or an insurer under clause (iii); interest paid by a firm to its partner under clause (iv); the co-operative society exemptions in clauses (v) and (viia), which since 1 April 2020 are switched off only where both conditions in the proviso are met — the society's turnover exceeded fifty crore rupees in the preceding financial year and the interest to that payee crossed one lakh rupees for a senior citizen or fifty thousand rupees for anyone else; and the two Motor Accidents Claims Tribunal limbs in clauses (ix) and (ixa), where interest credited is never liable and interest paid is liable only above fifty thousand rupees in the financial year — a figure the Finance Act, 2025 did not move. Section 197A(1A) and (1C) let a payee stop the deduction by declaration — Form No. 15G, or Form No. 15H for a resident individual aged sixty or more, both prescribed by rule 29C. From 1 April 2026 the Income-tax Act, 1961 was repealed by section 536 of the Income-tax Act, 2025; the successor is section 393(1) of the 2025 Act, whose Table carries the same three figures.
• Statutory position — section 56(2)(xii): a business trust distribution that is neither 10(23FC)/(23FCA) income nor taxed under 115UA(2) is taxable above the issue price from 1 April 2024 CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — s.10(23FC): the business trust's own exemption for interest and for dividend from a special purpose vehicle, and what a "special purpose vehicle" is CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client is a registered InvIT. It receives interest and dividend from the project companies it controls. Is that income taxed in the trust's hands, and if not, where does the charge go?
  Neither is taxed in the trust's hands. Clause (23FC) of section 10 keeps out of the trust's total income (a) interest received or receivable from a special purpose vehicle and (b) dividend received or receivable from a special purpose vehicle. The charge does not disappear: section 115UA(3) moves income of the nature described in clause (23FC) to the unit holder, and section 10(23FD) — which exempts the rest of a distribution in the unit holder's hands — expressly does not cover the interest limb, and does not cover the dividend limb where the special purpose vehicle has exercised the option under section 115BAA. A "special purpose vehicle" is defined inside the clause itself as an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest required by the regulations under which the trust is registered.
• Statutory position — s.10(23FD): the unit holder's exemption for the rest of a business trust distribution, and the s.115BAA switch that decides whether SPV dividend is taxed in his hands CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client holds units in a listed REIT. The Form 64B shows several components. Which of them does he actually pay tax on, and on what basis is the rest exempt?
  Clause (23FD) of section 10 exempts, in the unit holder's hands, any distributed income referred to in section 115UA received by him from the business trust — but not the proportion of it that is of the same nature as the income referred to in sub-clause (a) of clause (23FC), or clause (23FCA), or sub-clause (b) of clause (23FC) in a case where the special purpose vehicle has exercised the option under section 115BAA. So the interest component and the direct-rent component are always taxable to him; the special purpose vehicle dividend component is taxable to him only if that vehicle is on the concessional corporate rate in section 115BAA, and is otherwise exempt; and everything else the trust distributes out of income that has already borne tax at trust level under section 115UA(2) is exempt. The words carrying the section 115BAA condition were put into the clause by section 7(II)(c) of the Finance Act, 2020 with effect from 1 April 2021.
• Statutory position — s.2(13A): a "business trust" is a trust registered as an InvIT or a REIT, and since 1 April 2021 its units need not be listed CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my client cannot be a "business trust" because its units are not listed on any stock exchange, so the whole of Chapter XII-FA is denied to it. Is that still the law?
  No. Section 2(13A) now defines a business trust simply as a trust registered as an Infrastructure Investment Trust under the SEBI (Infrastructure Investment Trusts) Regulations, 2014, or as a Real Estate Investment Trust under the SEBI (Real Estate Investment Trusts) Regulations, 2014, both made under the Securities and Exchange Board of India Act, 1992. The closing words that used to require the units to be listed — "the units of which are required to be listed on recognised stock exchange in accordance with the aforesaid regulations" — and the word "and" that carried them were both omitted by Act No. 12 of 2020 with effect from 1 April 2021. For any previous year from 2020-21 onwards, listing is irrelevant to the definition; registration is everything.
• Statutory position — s.115-O(6), (7) and (8): the SEZ developer exemption that died on 1 June 2011, the business trust carve-out and the IFSC unit carve-out CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client is an SEZ developer and paid no DDT on dividends declared out of current income. The Assessing Officer says the exemption was withdrawn. When did it go, and are there other carve-outs I should be looking at?
  Section 115-O(6) exempted from tax on distributed profits any amount declared, distributed or paid on or after 1 April 2005 out of its current income by an undertaking or enterprise engaged in developing, or developing and operating, or developing, operating and maintaining a Special Economic Zone, in the hands of the developer or enterprise or the person receiving the dividend — but its proviso says in terms that the provisions of that sub-section shall cease to have effect from 1 June 2011. Two other carve-outs sit alongside it and are still worth checking for a pre-2020 year: sub-section (7) for a specified domestic company distributing to a business trust out of current income on or after the specified date, and sub-section (8) for a company that is a unit of an International Financial Services Centre deriving income solely in convertible foreign exchange, on amounts declared on or after 1 April 2017 out of current income or income accumulated as such a unit after 1 April 2017.
• Statutory position — how DDT was abolished: the end-date written into s.115-O(1), s.115R(2) and s.115BBDA(1), and the withholding that replaced it under s.194 and s.194K CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  Everyone says DDT was abolished in 2020. Which provision actually did it, from what date, and what withholding took its place on dividend and on mutual fund income?
  No section was repealed. The abolition was done by writing an end-date into the charging words themselves: s.115-O(1) now charges only dividend declared, distributed or paid 'on or after the 1st day of April, 2003 but on or before the 31st day of March, 2020'; s.115R(2) charges only income distributed by a specified company or Mutual Fund 'on or before the 31st day of March, 2020'; and s.115BBDA(1) reaches only dividend 'declared, distributed or paid by a domestic company or companies on or before the 31st day of March, 2020'. Dividend then fell to be taxed in the shareholder's hands, with withholding revived under s.194 for dividend paid by a company and s.194K for income in respect of mutual fund units, both at ten per cent.
• Statutory position — s.10(23FCA): a REIT's exemption for rent from real estate it owns directly, and why an InvIT cannot use it CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client is a registered REIT that owns some office buildings directly rather than through a project company, and lets them out. Is that rent taxed in the REIT's hands at the maximum marginal rate?
  No. Clause (23FCA) of section 10 keeps out of a business trust's total income any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust. The clause was inserted by section 7(III)(d) of the Finance Act, 2015 with effect from 1 April 2016, and "real estate asset" takes the meaning given to it in clause (zj) of sub-regulation (1) of regulation 2 of the SEBI (Real Estate Investment Trusts) Regulations, 2014. Two limits are on the face of it: the trust must be a real estate investment trust, so an InvIT cannot use the clause; and the asset must be owned directly by the trust, so rent earned by a special purpose vehicle and passed up as interest or dividend is on a different clause altogether.
• Statutory position — section 115UA: what a REIT or InvIT passes through, what it pays at the maximum marginal rate, and the 2023 carve-out CBDT Circulars & InstructionsCuts both ways
  My client holds units in a listed REIT. Which part of what the trust distributes is taxable in his hands, and what does the trust itself pay tax on?
  Section 115UA(1) makes the distributed income of a business trust retain, in the unit holder's hands, the same nature and proportion it had in the trust's, and section 115UA(3) charges to tax in the unit holder's hands the distributed income which is of the nature referred to in clause (23FC) or clause (23FCA) of section 10 — broadly, interest and dividend from the special purpose vehicle, and rent from directly held property. Everything else forming the trust's own total income is charged in the trust's hands at the maximum marginal rate under section 115UA(2), subject to sections 111A and 112; and since 1 April 2024 sub-section (3A) removes the character-retention rule altogether for a sum charged under section 56(2)(xii).
• Statutory position — section 47(xvii) with section 49(2AC): swapping SPV shares for business trust units is not a transfer, and the gain is deferred to the sale of the units CBDT Circulars & InstructionsCuts both ways
  My client is contributing his shares in a project company to a REIT and taking units in exchange. Is that a taxable transfer now?
  No. Section 47(xvii) takes out of section 45 any transfer of a capital asset, being a share of a special purpose vehicle, to a business trust in exchange for units allotted by that trust to the transferor, so no capital gain arises on the swap itself. The charge is deferred rather than forgiven: section 49(2AC) provides that where a unit of a business trust became the property of the assessee in consideration of a transfer referred to in section 47(xvii), the cost of acquisition of the unit is deemed to be the cost of acquisition to him of the share, so the whole of the accumulated gain surfaces when the units are sold.
• Statutory position — section 194LBA: the three withholding rates on a business trust distribution, and the section 115BAA switch in sub-section (2A) CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — rule 12CA and rule 12CB with s.115UA(4) and s.115UB(7): the two pass-through statements, Forms 64A to 64D, and the 15 June and 30 June dates CBDT Circulars & InstructionsCuts both waysNo later treatment found
  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?
  There are two parallel sets and they are not interchangeable. For a business trust, section 115UA(4) requires the person responsible for paying the distributed income to furnish a statement to the unit holder and to the prescribed authority, and rule 12CA prescribes it: Form No. 64A, verified by an accountant and filed electronically under digital signature with the Principal Commissioner or Commissioner within whose jurisdiction the principal office of the business trust is situated, by 15 June of the financial year following the previous year in which the income is distributed; and Form No. 64B to the unit holder by 30 June of that financial year, generated and downloaded from the departmental web portal. For an investment fund, section 115UB(7) requires the same thing and rule 12CB prescribes Form No. 64C to the unit holder by 30 June and Form No. 64D to the Principal Commissioner or Commissioner by 15 June, on the same electronic footing.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.