Introduction
Pass-through taxation under Sections 115UA and 115UB of the Income Tax Act, 1961, addresses the taxation of income from Business Trusts and Investment Funds. This guide provides a detailed analysis of these provisions, including tax implications for both the trust entities and the unit holders, as well as filing requirements.
Business Trusts: Overview and Taxation
1. What is a Business Trust?
As defined under Section 2(13A) of the Income Tax Act, a Business Trust is a trust registered as:
- Infrastructure Investment Trust (InvIT): Registered under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014.
- Real Estate Investment Trust (REIT): Registered under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014.
These trusts operate similarly to mutual funds but focus on investing in real estate or infrastructure projects. They raise capital through the issuance of units, which are listed on stock exchanges, and invest in various assets.
Note: The Finance Act, 2020, expanded the definition of Business Trusts to include both listed and unlisted InvITs and REITs registered with SEBI, effective from April 1, 2020.
2. Taxability under Section 115UA
Section 115UA governs the taxation of income distributed by Business Trusts. The tax treatment varies depending on the nature of income distributed:
Interest Income
- Resident Unit Holders: Taxed at applicable slab rates.
- Non-Resident Unit Holders: Taxed at 5%.
- TDS: Business Trusts must deduct TDS at 10% for resident and 5% for non-resident unit holders.
Example: Ms. Priya receives Rs. 30,000 as interest income from a Business Trust. She will include this in her Income Tax Return and be taxed according to her applicable slab rate.
Rental Income
- Taxed as income from house property in the hands of unit holders.
- Business Trusts must deduct TDS at 10% for resident and at applicable rates for non-resident unit holders.
Example: Mr. Raj receives Rs. 25,000 as rental income. This amount should be reported as rental income in his Income Tax Return.
Dividend Income
- Exempt in the hands of unit holders and the Business Trust itself.
Note: The dividend tax regime has shifted from the company to the shareholder level from April 1, 2020. However, Business Trusts still benefit from the exemption for dividends.
Other Income
- Exempt under Section 10(23FD) in the hands of unit holders.
Example: Ms. Priya receives Rs. 20,000 and Rs. 23,000 from other sources, which are exempt in her hands.
3. Capital Gains on Sale of Units
Short-Term Capital Gains (STCG)
- Taxed at 15% under Section 111A if STT is paid.
- No deductions under Chapter VI-A allowed.
Long-Term Capital Gains (LTCG)
- Taxed at 10% under Section 112A, exceeding Rs. 1 lakh.
- No indexation benefits are available.
Example: Mr. Raj sells units held for over 36 months. Any LTCG will be taxed at 10% if it exceeds Rs. 1 lakh.
4. Filing Requirements
- Business Trusts: Required to file returns under Section 139(4E).
- Statements:
- Form 64A: To be filed by the Business Trust by November 30 of the following financial year.
- Form 64B: To be provided to unit holders by June 30 of the following financial year.
Investment Funds: Overview and Taxation
1. What are Investment Funds?
Investment Funds, including:
- Alternative Investment Funds (AIFs)
- Specified Investment Funds (SIFs)
are designed to pool capital from multiple investors and make investments in various assets, distributing income to investors.
2. Taxability under Section 115UB
Section 115UB provides tax treatment for income from Investment Funds:
Income Received by the Fund
- Investment Funds are not taxed at the fund level. The income is passed through to the investors and taxed in their hands.
Taxability in the Hands of Investors
- Pass-Through Treatment: Income is taxed based on its nature (e.g., interest, dividends) and the investor’s residential status.
Example: If Ms. Priya receives interest income from an AIF, she must report it based on her residential status and the type of income.
3. Filing Requirements
- Investment Funds: Must adhere to specific reporting requirements for income distributions.
Key Differences Between Sections 115UA and 115UB
| Aspect | Section 115UA | Section 115UB |
|---|---|---|
| Applicability | Business Trusts (REITs, InvITs) | Investment Funds (AIFs, SIFs) |
| Nature of Trust | Direct investments in real estate or infrastructure | Funds pooling investments and distributing income |
| Taxability of Income | Pass-through for unit holders (Interest, Rental, Dividend) | Pass-through for investors (Interest, Dividends, Other) |
| Tax Rate on Capital Gains | 15% for STCG; 10% for LTCG | Dependent on the investor’s tax status and income type |
| Filing Requirements | Forms 64A and 64B for Business Trusts | Specific to Investment Funds reporting distributions |
Conclusion
Sections 115UA and 115UB establish a framework for the taxation of pass-through income from Business Trusts and Investment Funds. Understanding these provisions helps ensure compliance and optimize tax planning. Proper reporting and adherence to filing requirements are crucial for both trust entities and investors to manage their tax obligations effectively.
FCA Surekha Ahuja
