Section 194LBB: TDS on Investment Fund Income - Rates and Rules
Section 194LBB of the Income-tax Act, 1961 governed tax deduction at source (TDS) on specified income payable to unit holders of an eligible investment fund. It formed part of the special pass-through taxation framework for qualifying alternative investment funds (AIFs). This article explains the statutory scope, resident and non-resident rates, exclusions, definitions and withholding obligations, with a note on the Income-tax Act, 2025.
Section 194LBB at a glance
| Issue | Position under Section 194LBB |
|---|---|
| Deductor | Person responsible for paying specified income in respect of units of a qualifying investment fund |
| Payee | Resident unit holder, non-resident individual or other non-resident, or foreign company |
| Resident TDS rate | 10% |
| Non-resident TDS rate | Rates in force, subject to the statutory non-chargeability exception and applicable treaty relief |
| Deduction event | Credit to the unit holder's account or payment, whichever is earlier |
| Monetary threshold | No general minimum payment threshold specified in this section |
| Excluded portion | Proportion of income of the nature referred to in Section 10(23FBB) |
What income is covered?
The provision applied where income was payable to a unit holder in respect of units of an investment fund specified in Explanation 1(a) to Section 115UB, other than the proportion of income having the same nature as income referred to in Section 10(23FBB). It was introduced by the Finance Act, 2015, with effect from 1 June 2015, and subsequently amended.
Section 115UB established a special tax treatment for eligible investment funds and their unit holders. The character and allocation of each income component matter: a distribution should not automatically be treated as one uniform type of income for TDS purposes.
Definitions and related provisions
Investment fund - Section 115UB
The expression refers to an eligible fund within the definition in Explanation 1(a) to Section 115UB, linked to qualifying Alternative Investment Funds registered under the applicable SEBI framework. Eligibility must be checked against the statutory definition and the fund's regulatory status, not assumed from the commercial use of the term "investment fund".
Unit - Section 115UB
The term unit has the meaning assigned in Explanation 1(c) to Section 115UB. The provision concerns income payable to a holder of such units.
Section 10(23FBB) exclusion
The proportion of income of the nature referred to in Section 10(23FBB) is excluded from the withholding base under Section 194LBB. This is connected to the special treatment of certain business income at fund level. Fund statements and income characterisation should support any exclusion.
TDS rates for resident and non-resident unit holders
Resident unit holder - 10%
For a resident payee, Section 194LBB prescribed deduction at 10% on income within its scope. The amount is computed on the relevant taxable distribution component, not necessarily the full cash received where part of it falls outside the section.
Non-resident unit holder - rates in force
For a non-resident (other than a company) or a foreign company, the section prescribed withholding at the rates in force. The applicable rate may depend on the income category, Finance Act, surcharge and cess, treaty provisions and the recipient's circumstances. A blanket 10% rate must not be assumed for non-residents.
The proviso expressly stated that no deduction is required on income not chargeable to tax under the Act when the payee is a non-resident or foreign company. Claims of non-chargeability or treaty relief should be supported by appropriate documentation and professional review.
When must TDS be deducted?
Deduction was required at the earlier of (a) credit of covered income to the unit holder's account or (b) payment by cash, cheque, draft or any other mode. Crediting income to a suspense account or another account name in the payer's books is treated as credit to the payee for this purpose. Merely changing the ledger description does not defer the statutory obligation.
Practical example
Assume a qualifying investment fund credits Rs. 4,00,000 of income to a resident unit holder, of which Rs. 1,00,000 is properly identified as the excluded Section 10(23FBB)-type proportion. Subject to the relevant facts, the Section 194LBB withholding base is Rs. 3,00,000 and TDS at 10% is Rs. 30,000. The fund should document its allocation. For a non-resident investor, a separate rates-in-force and chargeability analysis is required.
Compliance checklist for the payer
- Confirm that the fund and its units fall within the relevant statutory definition.
- Identify the unit holder's residential status and tax documentation, including PAN where applicable.
- Separate covered income from the excluded Section 10(23FBB)-type proportion.
- Apply the statutory rate or appropriate rates in force at the relevant credit or payment date.
- Deposit TDS, furnish the prescribed withholding statement and issue the applicable TDS certificate within the relevant deadlines.
- Maintain supporting investor statements, calculations, certificates and records of any claimed treaty relief.
Additional provisions concerning PAN, higher deduction rates, lower or nil deduction certificates and reporting may affect the final withholding obligation. For current payments, use the forms and timelines prescribed under the legislation in force.
Section 194LBB compared with related provisions
| Section of 1961 Act | Broad subject |
|---|---|
| 194LBA | Specified income distributed by business trusts, such as eligible REITs and InvITs |
| 194LBB | Specified income from units of eligible investment funds under Section 115UB |
| 194LBC | Income in respect of investment in a securitisation trust |
Position from 1 April 2026
The Income-tax Act, 2025 came into effect on 1 April 2026 and reorganised the tax-deduction provisions. Section 194LBB remains useful for interpreting payments and obligations arising under the 1961 Act. For new-period credits or distributions, consult the official text of the Income-tax Act, 2025, its applicable withholding tables, transitional provisions and current rules. Do not assume that historical forms or section references remain unchanged.
Frequently asked questions
Does Section 194LBB apply to every mutual fund?
No. It concerns units of an eligible investment fund defined by Section 115UB, not every product marketed as a mutual fund or investment scheme.
Is the TDS rate always 10%?
No. The 10% statutory rate applied to resident unit holders; non-residents were covered at rates in force, with the statutory exception for income not chargeable to tax.
Is there a Rs. 10,000 or Rs. 50,000 exemption threshold?
Section 194LBB did not prescribe a general minimum monetary threshold. The relevant income character and exclusions must still be examined.
Is TDS deducted only when money is transferred?
No. Credit to the payee's account, including a suspense account, could trigger deduction before actual payment.
What is the relevance of Section 10(23FBB)?
The proportion of income of the nature described in that provision is outside the Section 194LBB deduction base.
Official sources and further reading
Review the Income Tax Department's legislation and guidance, the official e-Filing portal, India Code and SEBI for the applicable statutes, rules, notifications and AIF regulatory framework.
This article provides general information. Actual withholding depends on the date, income character, fund eligibility, investor status and applicable law.