Understanding Section 115TD of the Income Tax Act: Impact on Business Trusts and Investment Funds

March 19, 2023

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Table of Contents

Introduction:

The Income Tax Act, 1961, has various provisions to ensure that taxpayers pay their taxes appropriately. One such provision is Section 115TD, which deals with the taxation of units of a business trust or an investment fund. This section was inserted by the Finance Act, 2014, and has been amended several times since then.

What is a Business Trust or Investment Fund?

Before we delve into the provisions of Section 115TD, let us understand what a business trust or investment fund is. A business trust is a trust that holds assets and carries on a business or an investment activity for the benefit of its unit holders. An investment fund, on the other hand, is a collective investment scheme that pools money from investors and invests in various securities.

Provisions of Section 115TD:

Section 115TD applies to business trusts and investment funds that are registered under the Securities and Exchange Board of India (SEBI) regulations. The section states that any income received by a unit holder from the business trust or investment fund shall be taxable in the hands of the unit holder. The tax rate applicable shall be as per the unit holder’s income tax slab.

However, if the business trust or investment fund distributes any income to its unit holders, such income shall not be taxed in the hands of the unit holders. Instead, the business trust or investment fund shall be liable to pay a tax at the maximum marginal rate on the distributed income.

Further, if the business trust or investment fund distributes any income to its unit holders and such distribution is in excess of the total income earned by the business trust or investment fund, such excess distribution shall be taxed in the hands of the unit holders. The tax rate applicable shall be as per the unit holder’s income tax slab.

Exceptions to Section 115TD:

There are certain exceptions to the provisions of Section 115TD. These are:

Income received by a unit holder from a business trust or investment fund that is set up as a pass-through entity for the purposes of income tax.
Income received by a unit holder from a business trust or investment fund that is set up as a Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT) and meets certain conditions as specified in the SEBI regulations.

Impact of Section 115TD on Business Trusts and Investment Funds: Business trusts and investment funds play a crucial role in the Indian economy, as they provide a platform for investors to invest in various securities and earn returns on their investments. However, the taxation of these entities has always been a complex issue. Section 115TD seeks to simplify the taxation of business trusts and investment funds by laying down clear provisions for the taxation of their income.

One of the significant impacts of Section 115TD is that it incentivizes business trusts and investment funds to distribute their income to unit holders. This is because any income distributed by these entities shall not be taxed in the hands of the unit holders but shall be taxed at the entity level. This provision ensures that the unit holders receive their returns without any deduction of taxes, which is a significant benefit for them.

Another impact of Section 115TD is that it encourages the setting up of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) in India. This is because these entities have been given certain exceptions under Section 115TD, which makes them more attractive to investors.

Compliance Requirements under Section 115TD: Business trusts and investment funds that are registered under the SEBI regulations must comply with the provisions of Section 115TD. These entities must maintain proper records of their income and distributions made to unit holders. They must also file their income tax returns in a timely manner and pay any taxes due.

Unit holders of business trusts and investment funds must also comply with the provisions of Section 115TD. They must declare any income received from these entities in their income tax returns and pay the taxes due as per their income tax slab.

Conclusion:

In conclusion, Section 115TD of the Income Tax Act, 1961, has simplified the taxation of business trusts and investment funds in India. The provisions of this section ensure that the income earned by these entities is taxed appropriately and that any distributions made to unit holders are also taxed appropriately. It is essential for business trusts, investment funds, and unit holders to comply with the provisions of this section to avoid any penalties or legal issues.

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Frequently Asked Questions (FAQs)

What is Section 115TD of the Income Tax Act, 1961? Section 115TD of the Income Tax Act, 1961, deals with the taxation of units of a business trust or an investment fund.
What is a Business Trust or Investment Fund? A business trust is a trust that holds assets and carries on a business or an investment activity for the benefit of its unit holders. An investment fund, on the other hand, is a collective investment scheme that pools money from investors and invests in various securities.
What is the tax rate applicable to income received by a unit holder from a business trust or investment fund? The tax rate applicable shall be as per the unit holder’s income tax slab.
What is the tax rate applicable to income distributed by a business trust or investment fund? The business trust or investment fund shall be liable to pay a tax at the maximum marginal rate on the distributed income.
What happens if the business trust or investment fund distributes income in excess of its total income earned? Such excess distribution shall be taxed in the hands of the unit holders, and the tax rate applicable shall be as per the unit holder’s income tax slab.
What are the exceptions to Section 115TD? Income received by a unit holder from a business trust or investment fund that is set up as a pass-through entity for the purposes of income tax, and income received by a unit holder from a REIT or InvIT that meets certain conditions as specified in the SEBI regulations.
What is the impact of Section 115TD on business trusts and investment funds? Section 115TD incentivizes business trusts and investment funds to distribute their income to unit holders and encourages the setting up of REITs and InvITs in India.
What are the compliance requirements under Section 115TD? Business trusts and investment funds must comply with the provisions of Section 115TD by maintaining proper records of their income and distributions made to unit holders, filing their income tax returns, and paying any taxes due. Unit holders must declare any income received from these entities in their income tax returns and pay the taxes due as per their income tax slab.
Why is it essential to comply with the provisions of Section 115TD? Compliance with the provisions of Section 115TD is essential to avoid any penalties or legal issues. Non-compliance can lead to fines, interest, and even prosecution in some cases.
Who can provide guidance on the provisions of Section 115TD? Qualified tax professionals, such as chartered accountants, can provide guidance on the provisions of Section 115TD and help ensure compliance with the income tax laws.