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TMI BlogSpecial Tax Regimes for Investment Funds : Clause 224 of Income Tax Bill, 2025 Vs. Section 115UB of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... ital markets and private investment landscape. The legislative evolution from Section 115UB to Clause 224 reflects not only the need for clarity and modernization but also the policy imperative to maintain India's competitiveness as a destination for alternative capital while safeguarding tax revenues and preventing abuse. This commentary provides a detailed analysis of Clause 224, elucidates its objectives, and compares its provisions with existing law and rules. It also examines the practical and policy implications for stakeholders, highlighting areas of continuity, change, and potential ambiguity. Objective and Purpose The principal objective behind Clause 224 is to codify and refine the special taxation regime for investment funds and their unit holders, preserving the "pass-through" principle while updating definitions, clarifying loss treatment, and aligning with regulatory developments. The legislative intent is to: * Ensure income from investment funds is taxed in the hands of unit holders, except for certain categories of income (e.g., business income). * Clarify the treatment and carry-forward of losses at both the fund and unit holder levels. * Provide for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nits on that date, and such unit holders may carry forward and set off these losses for the remaining eligible period. Clause 224(4) expressly denies the fund the ability to carry forward such losses after 1 April 2019. This transitional mechanism was introduced in Section 115UB(2A) via amendment and is faithfully replicated in Clause 224. It addresses the practical challenge of loss carry-forward in the context of regime change, ensuring that investors are not unduly prejudiced or unjustly enriched. 4. Character and Proportion of Income Clause 224(5) provides that income paid or credited by the fund is deemed to retain its character and proportion in the hands of the unit holder as it had in the hands of the fund, subject to the loss treatment in sub-section (2). This preserves the integrity of the income stream (e.g., interest, dividends, capital gains) and prevents re-characterization for tax purposes. This provision is identical in substance to Section 115UB(3). 5. Taxation of the Fund Clause 224(6) clarifies that the fund's total income is taxed at the rates specified in the Finance Act if it is a company or firm, or at the maximum marginal rate in other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Burden: Funds must maintain detailed records of income and loss allocations, holding periods, and must generate and file prescribed statements (Forms 64C and 64D) in a timely manner. * Transitional Relief: The transitional provisions for losses as of 31 March 2019 provide certainty and continuity for funds and investors affected by regime changes. For Unit Holders * Direct Taxation: Investors are taxed as if they held underlying investments directly, preserving the character of income and enabling utilization of losses (subject to conditions). * Holding Period Conditions: The requirement to hold units for at least twelve months to receive pass-through of certain losses may affect investment strategies and liquidity decisions. * Double Taxation Avoidance: The explicit exclusion of double taxation on accrual and actual receipt prevents unfair tax outcomes. For Regulators and Tax Authorities * Transparency and Oversight: The prescribed statements and electronic filing requirements facilitate monitoring and enforcement. * Alignment with SEBI/IFSCA: The regime is closely tied to regulatory recognition, ensuring only bona fide, regulated funds benefit from the special t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rral and arbitrage through fund structures. * Ensuring tax neutrality and fairness for investors. * Aligning with evolving regulatory frameworks (SEBI, IFSCA). The abolition of DDT and the increasing importance of IFSCA-regulated funds are reflected in the updated provisions, indicating a forward-looking approach. Comparative Features Table Feature Clause 224 of the Income Tax Bill, 2025 Section 115UB of the Income-tax Act, 1961 Rule 12CB of the Income-tax Rules, 1962 Pass-through of income Yes (Sub-section 1) Yes (Sub-section 1) N/A Business income taxed at fund level Yes (Sub-section 2(a)) Yes (Sub-section 2(i)) N/A Non-business losses: 12-month holding Yes (Sub-section 2(b)) Yes (Sub-section 2(ii)) N/A Legacy losses as of 31.03.2019 Yes (Sub-sections 3, 4) Yes (Sub-section 2A) N/A Character/proportion of income Yes (Sub-section 5) Yes (Sub-section 3) N/A Tax rates for fund Finance Act/MMR (Sub-section 6) Finance Act/MMR (Sub-section 4) N/A Deemed credit of income Yes (Sub-section 7) Yes (Sub-section 6) N/A Double taxation avoidance Yes (Sub-section 8) Yes (Explanation 2) N/A Reporting obligations Y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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