Section 115UB– Taxation of income of Investment funds- Clarity required on taxation of Category III AIF

Issue/Justification

Several Category I and II Alternative Investment Funds (AIFs) are registered with SEBI. With effect from Financial Year (FY) 2015-16, the tax ability of the income earned by AIFs is governed by a special tax regime as provided under Section 115UB of the Income tax Act, 1961 (the Act), which is summarized as follows:

  • Any income (other than business income) earned by a SEBI registered Category I and II AIF, is exempt from tax in the hands of the AIF under Section 10(23FBA) of the Act. Such income shall be taxable directly in the hands of the investors of the AIF under Section 115UB of the Act.
  • The investors shall be chargeable to tax in the same manner as if it were the income accruing or arising to, or received by, such investor had the investments, made by the AIF, been made directly by such investor. Income taxable in investors’ hands shall be deemed to be of the same nature and proportion as in the hands of the AIF.
  • Further, in terms of Section 115UB(2) of the Act, in case there is a loss at the fund level (i.e. current loss or loss which remained to be set off), such loss shall not be allowed to be passed through to the investors but would be carried forward at AIF level to be set off against income of future years in accordance with the provisions of Chapter VI of the Act.

While the said section provides methodology of taxing of AIF Category I and II, however, it is silent regarding the tax-ability of AIF category III.

Suggestion

It is suggested that clarity may be provided on taxation of Category III AIF under section 115UB.

Source-  ICAI Pre- Budget Memorandum–2018 (Direct Taxes and International Tax)

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