Income-tax Act, 1961 | Chapter XII-E

Section 115R of Income-tax Act: Tax on Distributed Income to Unit Holders

Section 115R governed additional income-tax on distributions by specified companies and mutual funds. This guide explains the historical rates, statutory definitions, exemptions, payment deadline and the change effective 1 April 2020.

Current legal position: The distribution tax under Section 115R(2) applies only to income distributed on or before 31 March 2020. From 1 April 2020, mutual fund income distributions are generally taxable in the hands of unit holders under the applicable provisions, rather than under the former fund-level distribution tax regime.

What is Section 115R?

Section 115R, in Chapter XII-E of the Income-tax Act, 1961, imposed an additional income-tax on certain income distributed to unit holders by the Unit Trust of India, a specified company or a mutual fund. It was commonly called mutual fund dividend distribution tax or distribution tax. The liability was imposed on the distributing entity, not directly on the investor, for distributions covered by the historical regime.

The Finance Act, 2020 changed the system: Section 115R(2) was restricted to distributions made on or before 31 March 2020. Consequently, historical rates below should not be treated as current rates on new mutual fund payouts.

Section 115R: Explanation of each subsection

Subsection (1): Historical Unit Trust of India distributions

Subsection (1) dealt with income distributed by the Unit Trust of India to unit holders on or before 31 March 2002 and imposed additional income-tax at 10%. A proviso excluded qualifying distributions from open-ended equity-oriented funds for the three-year period beginning 1 April 1999. This is a legacy provision, not a present-day charge on ordinary mutual fund distributions.

Subsection (2): Specified companies and mutual funds

Under subsection (2), a specified company or mutual fund was liable to additional income-tax on income distributed to unit holders on or before 31 March 2020, subject to applicable categories and exclusions. The rate depended on the type of fund and the recipient. Historical rates, before applicable surcharge and cess, are set out below.

Subsection (2A): Grossing up

For determining tax under subsection (2), the amount distributed was grossed up so that the amount remaining after the statutory tax equalled the distribution made to unit holders. This rule affected the fund's effective tax cost. Surcharge and cess could increase the total liability.

Subsection (3): Deadline for paying distribution tax

The person responsible and the relevant distributing entity were required to deposit the tax with the Central Government within 14 days from distribution or payment, whichever was earlier. This deadline remains relevant when examining historical unpaid liabilities.

Subsection (4): No deduction

Subsection (4) disallowed a deduction to the Unit Trust of India or mutual fund for income that had been charged to tax under subsection (1) or (2).

Historical Section 115R tax rates

Type of distribution	Recipient	Base rate
Money market or liquid mutual fund	Individual or Hindu undivided family (HUF)	25%
Money market or liquid mutual fund	Other persons	30%
Equity-oriented fund	Any person	10%
Other mutual fund	Individual or HUF	25%
Other mutual fund	Other persons	30%
Qualifying infrastructure debt fund scheme	Non-resident (other than a company) or foreign company	5%

These are historical statutory base rates from the pre-April 2020 framework, not current tax rates. The precise rate, exclusions, surcharge and cess must be determined with reference to the law applicable on the actual distribution date.

Historical exceptions and definitions

Administrator and specified company: These expressions were linked to the definitions in the Explanation to Section 10(35), referring to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.

Infrastructure debt fund scheme: The provision cross-referred to Regulation 49L of the SEBI (Mutual Funds) Regulations, 1996, as applicable during the relevant period.

Equity-oriented fund: Classification depended on the applicable statutory definition, including the relevant cross-reference to Section 112A and Section 115T.

Exemptions: The historical law excluded distributions by the Administrator of the specified undertaking and provided a conditional exemption for certain specified mutual funds deriving income from transactions on a recognised stock exchange in an International Financial Services Centre, subject to the statutory conditions. The earlier exclusion concerning certain equity-oriented distributions was subsequently omitted.

Tax treatment of mutual fund distributions from 1 April 2020

The Finance Act, 2020 moved taxation of mutual fund income distributions from the fund level to the unit holder level. Section 10(35), which historically exempted specified income from units in the recipient's hands, does not provide that exemption for income received on or after 1 April 2020.

For post-March 2020 distributions, unit holders generally include taxable income distributions in their income and apply the relevant rate and withholding provisions. Section 194K may require tax deduction at source on qualifying payments to resident unit holders, subject to its conditions and threshold. For non-residents, applicable withholding provisions and treaty relief may be relevant. Redemption or sale of units is a separate transaction and may give rise to capital gains or other treatment under the provisions applicable to the particular units and date.

The change should not be confused with a blanket tax on the entire amount of mutual fund redemptions. The Central Board of Direct Taxes has clarified that redemption or repurchase of units and allotment of bonus units were not, merely for that reason, distributions subject to the historical tax under Section 115R(2).

Illustrative examples

Example 1: Distribution in financial year 2019-20

If a mutual fund distributed income to unit holders on 15 March 2020, the fund-level distribution tax provisions could apply, subject to the type of fund, recipient, applicable rate and exclusions. Any tax due had to be deposited within the statutory 14-day period.

Example 2: Distribution after 31 March 2020

If a mutual fund paid an income distribution of Rs. 20,000 to a resident individual during financial year 2025-26, the former Section 115R distribution tax would not be levied on that payout. Instead, the unit holder's tax treatment and any withholding would be examined under the rules applicable to the recipient and payment.

Frequently asked questions

Is Section 115R still applicable to new mutual fund distributions?

No. The fund-level tax under subsection (2) is limited to distributions on or before 31 March 2020. The section can still matter for disputes, assessment and recovery relating to earlier distributions.

Were all equity mutual fund distributions always exempt?

No. The historical treatment changed over time. A 10% base rate was introduced for equity-oriented fund distributions from 1 April 2018, subject to the law then in force.

Is income distributed by a mutual fund exempt for investors today?

Not under the former Section 10(35) exemption for amounts received on or after 1 April 2020. Tax depends on the investor's circumstances and applicable provisions.

Does Section 115R apply to redemption proceeds?

Redemption or repurchase of mutual fund units was distinguished from distributions for purposes of the former Section 115R tax. Separate tax rules govern redemption transactions.

Official legal references

Editorial note: This article explains Section 115R of the Income-tax Act, 1961 and its historical operation. For a particular assessment or payment, verify the statute and rules applicable to the relevant financial year.