Income-tax law / Investment funds / AIF taxation

Section 115UB: Taxation of Investment Funds and Unit Holders

Section 115UB of the Income-tax Act, 1961 sets out the special tax framework for qualifying Category I and Category II Alternative Investment Funds (AIFs) and their investors. It distinguishes income taxable directly in the hands of unit holders from business income taxable at the fund level.

Important legislative context: This page explains Section 115UB of the Income-tax Act, 1961, including amendments relevant to earlier assessment years. The Income-tax Act, 2025 applies from 1 April 2026; for transactions and returns governed by that Act, consult its corresponding provisions and transition rules. References to section numbers below are to the 1961 Act unless stated otherwise.

1. Meaning and scope of Section 115UB

Introduced by the Finance Act, 2015 with effect from assessment year 2016-17, Section 115UB provides a pass-through framework for eligible investment funds. The central principle is that eligible income retains its character in the hands of the investor: interest remains interest, capital gains remain capital gains, and so on, subject to the Act's specific exclusions and rules.

Definitions under Explanation 1

Investment fund: A fund established or incorporated in India as a trust, company, limited liability partnership or body corporate, registered as a Category I or Category II AIF under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, as covered by the statutory definition. Category III AIFs are not included merely because they are registered as AIFs.
Trust: A trust constituted under the Indian Trusts Act, 1882 or another law in force.
Unit: The beneficial interest of an investor in an investment fund or scheme, including shares or partnership interests.
Unit holder: An investor holding a unit or qualifying beneficial interest in the investment fund.
Maximum marginal rate: The highest rate of income-tax applicable to the specified category of income under the relevant Finance Act, including applicable additions where required by law.

2. Section 115UB explained, sub-section by sub-section

Section 115UB(1): Tax in the hands of unit holders

Subject to the other provisions of the Chapter, income accruing, arising or received by a unit holder from investments made through an eligible investment fund is chargeable as if the investor had made the underlying investments directly. This rule must be read with the exemptions for the fund and the specific treatment of business income.

Section 115UB(2): Losses and set-off

The treatment of losses was materially changed by the Finance (No. 2) Act, 2019. Business losses are retained at the investment fund level for carry-forward and set-off as permitted by law. Eligible non-business losses may be allocated to unit holders, subject to statutory conditions, including the holding period of the units. The applicable rules depend on the year in which the loss arose.

Section 115UB(3): Character and proportion of income

Income paid or credited by the fund is treated as having the same nature and proportion in the hands of the unit holder as in the fund, subject to the loss rules. Investors should use the income-category breakup reported by the fund rather than treating the entire distribution as a single category of income.

Section 115UB(4): Taxation at fund level

For income chargeable at the fund level, the provision prescribes the applicable Finance Act rates where the investment fund is a company or firm and the maximum marginal rate in other cases. The operation of this subsection must be read alongside the exemption in Section 10(23FBA), which generally exempts eligible non-business income of the fund.

Section 115UB(5): Exclusion of certain distribution-tax chapters

The provision excludes the application of the specified historical distribution-tax chapters to income paid by an investment fund under this framework. It should not be read as a general exemption from all withholding, filing or investor-level taxation requirements.

Section 115UB(6): Deemed credit of undistributed income

Eligible income that accrues to the fund but is not actually paid or credited to investors during the year may be deemed credited to them on the last day of the previous year, in the proportion of their entitlement. Accordingly, an investor may have a tax obligation without a corresponding cash distribution.

Section 115UB(7): Reporting statements

The person responsible for paying or crediting income, together with the investment fund, must furnish prescribed statements to the unit holders and income-tax authorities. Rule 12CB and the prescribed forms provide the reporting mechanism.

Explanation 2: No double taxation on later payment

Where income has already been included in a unit holder's total income on accrual or deemed credit, its later actual payment is not included again merely because cash is distributed in a subsequent year.

3. Taxation of AIF income: fund versus unit holder

Income category	General treatment at fund level	General treatment for unit holder
Interest and other eligible non-business income	Generally exempt under Section 10(23FBA)	Taxable under applicable provisions, preserving character
Capital gains	Generally exempt at fund level under Section 10(23FBA), subject to conditions	Taxable in investor's hands at applicable capital-gains rates and rules
Profits and gains of business or profession	Generally taxable at fund level	Corresponding distributed income generally exempt under Section 10(23FBB)
Eligible non-business loss	Pass-through may apply subject to Section 115UB(2)	Eligible investor may set off or carry forward subject to conditions
Business loss	Retained by fund for permitted set-off/carry-forward	Not passed through as an investor-level business loss

Key related provisions: Sections 10(23FBA), 10(23FBB), 115UB and 194LBB should be read together. Applicable capital-gains provisions, surcharge, cess and treaty benefits, where available, require separate examination.

4. Treatment of losses and the 2019 amendment

The Finance (No. 2) Act, 2019 revised Section 115UB(2) to allow qualifying non-business losses to flow through to eligible unit holders. In broad terms, non-business losses other than the excluded categories can be allocated only where the investor has held the unit for at least twelve months. A loss allocated to a unit holder is dealt with under the relevant set-off and carry-forward rules; it cannot also be used by the fund.

Transitional provisions apply to certain accumulated losses existing at 31 March 2019. The treatment of these losses is fact-specific and should be checked against the amendment text and fund statements. A business loss remains subject to carry-forward and set-off at the investment fund level.

5. TDS, reporting and compliance

Section 194LBB: Withholding generally applies to income payable to unit holders of investment funds, other than the business-income component exempt under Section 10(23FBB), subject to statutory rates, thresholds and exceptions. For non-residents, the applicable rate and treaty position must be checked.
Rule 12CB: Prescribes the statements of income paid or credited by an investment fund, including Form 64C for unit holders and Form 64D for the prescribed income-tax authority.
Annual reporting: The fund should communicate the character and proportion of income and eligible losses, including deemed credits, so that investors can complete their tax returns accurately.
Investor records: Retain unit-allotment dates, investment and distribution statements, tax deduction certificates and the fund's prescribed income statement.

6. Illustration of pass-through taxation

Assume a qualifying Category II AIF earns Rs. 12 lakh of interest, Rs. 8 lakh of capital gains and Rs. 5 lakh of taxable business income in a year. An investor is entitled to 10% of the relevant allocation.

Item	Fund amount	Illustrative 10% allocation
Interest	Rs. 12,00,000	Rs. 1,20,000 generally taxable to investor
Capital gains	Rs. 8,00,000	Rs. 80,000 generally taxable to investor under capital-gains rules
Business income	Rs. 5,00,000	Tax generally paid at fund level; related distribution ordinarily exempt for investor

The example is simplified. Actual allocation depends on the fund's terms, the nature of gains, investor status, applicable exemptions and current tax law. Deemed-credit rules may apply even where no cash is distributed.

7. Legislative history and applicability

Section 115UB was inserted by the Finance Act, 2015, effective from 1 April 2016, creating a special pass-through regime for qualifying Category I and II AIFs. The Finance (No. 2) Act, 2019 subsequently amended loss pass-through provisions. For tax years beginning on or after 1 April 2026, the Income-tax Act, 2025 and its transition provisions must be consulted rather than assuming that the 1961 Act's section numbering continues unchanged.

8. Frequently asked questions

What is Section 115UB?

It establishes a pass-through tax framework for qualifying Category I and Category II alternative investment funds. Eligible non-business income is generally taxed in the hands of unit holders as though they invested directly.

Is business income of a Category I or II AIF passed through?

No. Business income is generally taxable at the investment fund level under the applicable provisions; the corresponding distributed income is ordinarily exempt for the unit holder under section 10(23FBB).

Is income taxable only when an AIF distributes cash?

No. Under section 115UB(6), eligible income not paid or credited can be deemed credited to unit holders at the end of the previous year.

Can an AIF pass losses to investors?

Subject to the post-2019 rules, eligible non-business losses can pass through to qualifying unit holders, including the twelve-month holding condition. Business losses remain at fund level.

What reporting forms apply?

Rule 12CB prescribes Form 64C for unit holders and Form 64D for the income-tax authority, subject to the applicable filing requirements.

9. Official legal and regulatory references

This guide is for general legal information. The governing statute, relevant Finance Act, rules, notifications and facts of each investment determine the actual tax treatment.