Section 115UB of the Income Tax Act, 1961, deals with the taxation of income from investment in a specified investment fund. This section was introduced in the Finance Act, 2015, to provide clarity on the taxation of income from investment in an Alternative Investment Fund (AIF) registered with the Securities and Exchange Board of India (SEBI).
An Alternative Investment Fund is a privately pooled investment vehicle that invests in different assets such as stocks, debt, real estate, etc., and is not available to the general public. These funds are regulated by SEBI and can only be offered to select investors such as high net worth individuals, institutions, and qualified institutional buyers.
Section 115UB applies to all categories of AIFs, including Category I, Category II, and Category III funds. The tax treatment of income from investment in each category of AIFs differs under this section.
Category I AIFs are those funds that invest in start-ups, small and medium enterprises, social ventures, or infrastructure projects. The income earned from investment in such funds is treated as capital gains. If the investment is held for more than 12 months, it is considered long-term capital gains, and if held for less than 12 months, it is considered short-term capital gains. Long-term capital gains are taxed at 20%, with indexation benefits, while short-term capital gains are taxed at the applicable income tax slab rate.
Category II AIFs are those funds that invest in debt or real estate. The income earned from investment in such funds is treated as income from other sources and taxed at the applicable income tax slab rate.
Category III AIFs are those funds that use complex trading strategies to generate returns. The income earned from investment in such funds is treated as speculative income and taxed at the applicable income tax slab rate.
It is essential to note that the tax treatment of income from investment in AIFs is different from that of income from investment in Mutual Funds. Income from Mutual Funds is taxed as per the type of mutual fund, such as equity mutual funds, debt mutual funds, etc.
To summarize, Section 115UB of the Income Tax Act, 1961, provides clarity on the taxation of income from investment in AIFs. The tax treatment of income from investment in different categories of AIFs differs, and it is essential to understand the tax implications before investing in AIFs. It is advisable to consult a tax expert or a financial advisor before investing in AIFs to ensure that you make an informed decision.
- Exemption from Tax on Transfers
Section 115UB provides an exemption from tax on transfer of units of an AIF. If the transfer of units of an AIF is made on or after July 10, 2014, and before April 1, 2015, the income arising from such transfer is exempt from tax. However, if the transfer is made after April 1, 2015, the income is taxable under the head ‘Capital Gains’.
- Treatment of Business Income
The income earned by an AIF from its business activities is taxable as business income. However, if the income is earned by a Category I or Category II AIF, it is taxed as capital gains or income from other sources, as the case may be.
- Taxation of Carried Interest
Carried interest is a share of profits earned by the fund managers of an AIF. It is usually a percentage of the profits earned by the AIF over and above a certain threshold. Section 115UB provides that carried interest earned by the fund managers of an AIF is taxable as income from other sources.
- TDS on Income from AIFs
The income earned by an investor from investment in AIFs is subject to TDS (Tax Deducted at Source) as per the applicable rates. The fund manager of the AIF is responsible for deducting TDS and depositing it with the government. The investor can claim credit for the TDS deducted against their total tax liability.
In conclusion
Section 115UB of the Income Tax Act provides clarity on the taxation of income from investment in AIFs. It is essential to understand the tax implications before investing in AIFs to ensure that you make an informed decision. It is advisable to consult a tax expert or a financial advisor to understand the tax implications and make the most of your investments.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
Q. What is Section 115UB of the Income Tax Act?
Section 115UB of the Income Tax Act deals with the taxation of income from investment in a specified investment fund, i.e., Alternative Investment Funds (AIFs).
Q. What are Alternative Investment Funds (AIFs)?
Alternative Investment Funds are privately pooled investment vehicles that invest in different assets such as stocks, debt, real estate, etc., and are not available to the general public. These funds are regulated by SEBI and can only be offered to select investors such as high net worth individuals, institutions, and qualified institutional buyers.
Q. What is the tax treatment of income from investment in AIFs under Section 115UB?
The tax treatment of income from investment in AIFs under Section 115UB depends on the category of the AIF. Category I AIFs’ income is treated as capital gains, Category II AIFs’ income is treated as income from other sources, and Category III AIFs’ income is treated as speculative income.
Q. Is the tax treatment of income from investment in AIFs different from that of income from investment in Mutual Funds?
Yes, the tax treatment of income from investment in AIFs is different from that of income from investment in Mutual Funds. Income from Mutual Funds is taxed as per the type of mutual fund, such as equity mutual funds, debt mutual funds, etc.
Q. Is carried interest earned by fund managers of an AIF taxable under Section 115UB?
Yes, carried interest earned by fund managers of an AIF is taxable as income from other sources under Section 115UB.
Q. Is there any exemption from tax on transfer of units of an AIF under Section 115UB?
Yes, Section 115UB provides an exemption from tax on transfer of units of an AIF if the transfer is made on or after July 10, 2014, and before April 1, 2015.
Q. What is the TDS rate on income from investment in AIFs?
The TDS rate on income from investment in AIFs is as per the applicable rates. The fund manager of the AIF is responsible for deducting TDS and depositing it with the government.
Q. Can an investor claim credit for the TDS deducted against their total tax liability?
Yes, an investor can claim credit for the TDS deducted against their total tax liability.
