Section 115-UB Tax on income of investment fund and its unit holders
Introduction & Its Applicability:
Section 115-UB of Income Tax Act, 1961 shall be inserted by the Finance Act, 2015, and is applicable w.e.f. 01-04-2016.
Extract of Budget Speech (15-16):
I propose to undertake a series of steps in this direction to attract capital, both domestic and foreign. Tax ‘pass through’ is proposed to be allowed to both Category-I and Category-II Alternative Investment Funds, so that tax is levied on the investors in these Funds and not on the Funds per se.
Any income accruing or arising by any person as a unit holder, out of the investments made in the investment fund through an investment company, shall be chargeable to income tax in the hands of the unit holder as if such investment is directly made by him in such funds.
If the net result of computation of total income of the investment fund [without giving effect to the provisions of clause (23FBA) of section 10] is a loss under any head, and if such loss is not setoff with the income under any other head, in that case such loss is allowed to carried forward In accordance with the chapter VI of the act.
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 unit holder.
Income of the investment fund shall be charged at the standard rate (Corporate Tax Rate @30% + Surcharge + Cess + Education Cess) or any other maximum marginal rate as prescribed on the act.
Provisions of Chapter XII-D (Special Provisions relating to tax on distributed profits of Domestic Companies) or Chapter XII-E (Special Provisions relating to tax on distributed income) shall not apply to the income paid by an investment fund.
If any income accruing or arising by the investment fund has not been paid or credited into the account of unit holder, in that case, it would deemed to have been credited to the account of the unit holder on the last day of the previous year in the same proportion in which such unit holder is entitled to receive the income.
The person responsible for crediting or making the payment on the behalf of investment fund and the investment shall furnish the details to within the prescribed time to the person who is liable to tax in respect of such income & to the prescribed income tax authority in the prescribed form in this behalf.
Incomes from certain sources qualify as Pass through Income (PTIs). These incomes are not taxed at the source or origin; instead they are passed on to the actual recipient of the income, without any deduction. Sections 115 UA and 115 UB of the Income-tax Act, 1961, provides that any distribution of income by a business trust or investment fund to its investors (unit holders) shall be paid to them without any deduction of tax. Income distributed by such funds or trust is taxable directly in the hands of investors in the same nature, and not in the hands of the funds or trust. These funds and trusts are also required to report such distribution of income by them to the tax authority.
This will step up the ability of these Funds to mobilise higher resources and make higher investments in small and medium enterprises, infrastructure and social projects and provide the much required private equity to new ventures and start-ups.
Some important Definitions:
Pass through Income (PTIs)
A specified percentage of tax is deducted at each source of income, under the provision of tax deducted at source (TDS). For instance, if you have a fixed deposit with a bank and annual interest from the deposit crosses Rs.10,000, the bank is bound to deduct TDS, before crediting the interest into your account.
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 Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992.
A trust established under the Indian Trusts Act, 1882 or under any other law for the time being in force.
Unit means beneficial interest of an investor in the investment fund or a scheme of the investment fund and shall include shares or partnership interests.