Income Tax 2025

Appearance

Tax on income in case of venture capital undertakings. ​

222(1) ​

Irrespective of anything contained in any other provision of this Act, where a person, out of investments made in a venture capital company or venture capital fund, receives any income, or any income accrues or arises to him, such income shall be chargeable to income-tax in the same manner as if, it were the income accruing or arising to, or received by, such person, had he made investments directly in the venture capital undertaking.

222(2) ​

The person responsible for crediting or making payment of the income on behalf of a venture capital company or a venture capital fund and the venture capital company or venture capital fund shall furnish, within such time, as prescribed, to the person who is liable to tax in respect of such income and to the prescribed income-tax authority, a statement in the prescribed form and verified in the prescribed manner, giving details of the nature of the income paid or credited during the tax year and such other relevant details, as prescribed.

222(3) ​

The income paid or credited by the venture capital company and the venture capital fund shall be deemed to be of the same nature and in the same proportion in the hands of the person referred to in sub-section (1) as it had been received by, or had accrued or arisen to, the venture capital company or the venture capital fund, as the case may be, during the tax year.

222(4) ​

The provisions of Chapter XIX-B shall not apply to the income paid by a venture capital company or venture capital fund under this Chapter.

222(5) ​

The income accruing or arising to or received by the venture capital company or venture capital fund during a tax year from investments made in venture capital undertaking, if not paid or credited to the person referred to in sub-section (1), shall be deemed to have been credited to the account of the said person––

  • (a) on the last day of the tax year; and
  • (b) in the same proportion in which such person would have been entitled to receive the income had it been paid in the tax year.

222(6) ​

Any income which has been included in total income of the person referred to in sub-section (1) in a tax year, on account of it having accrued or arisen in the said tax year, shall not be included in the total income of such person in the tax year in which such income is actually paid to him by the venture capital company or the venture capital fund.

222(7) ​

Nothing contained in this section shall apply in respect of any income accruing or arising to, or received by, a person from investments made in a venture capital company or venture capital fund, being an investment fund specified in section 224(10)(a).

222(8) ​

For the purposes of this section, “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in Schedule V (Note 4).

Explanation

Section Summary: ​

This section deals with the taxation of income received by individuals or entities from investments made in venture capital companies (VCCs) or venture capital funds (VCFs). It ensures that such income is taxed as if the investor had directly invested in the venture capital undertaking (VCU). The section also outlines reporting requirements and clarifies how income is to be treated for tax purposes.

Key Changes: ​

  1. Direct Taxation of Income: Income from investments in VCCs or VCFs is now taxed as if the investor had directly invested in the VCU. This is a shift from previous provisions where such income might have been treated differently.
  2. Deemed Income Provisions: Income not distributed by the VCC or VCF is deemed to have been credited to the investor at the end of the tax year, ensuring timely taxation.
  3. Exclusion of Chapter XIX-B: The provisions of Chapter XIX-B (related to tax collection at source) do not apply to income paid by VCCs or VCFs under this section.
  4. Exclusion for Specific Funds: Income from investments in certain specified funds (as per Section 224(10)(a)) is exempt from the provisions of this section.

Practical Implications: ​

  1. For Investors: Investors in VCCs or VCFs will now be taxed on income as if they had directly invested in the underlying VCU. This could affect their tax liability, especially if the nature of income (e.g., capital gains, dividends) differs between direct and indirect investments.
  2. For VCCs/VCFs: These entities must provide detailed statements to both the investor and the tax authorities, outlining the nature and amount of income paid or credited during the tax year.
  3. Timing of Taxation: Income is taxable in the year it accrues or arises, even if it is not actually distributed. This could lead to tax liabilities in years where no cash is received by the investor.
  4. Avoidance of Double Taxation: Income already taxed in one year (due to accrual) will not be taxed again when actually distributed.

Critical Concepts: ​

  1. Venture Capital Company (VCC): A company that invests in startups or high-growth businesses.
  2. Venture Capital Fund (VCF): A pooled investment fund that invests in startups or high-growth businesses.
  3. Venture Capital Undertaking (VCU): The startup or high-growth business in which the VCC or VCF invests.
  4. Deemed Income: Income that is considered to have been received by the investor, even if it has not been physically distributed.
  5. Chapter XIX-B: This chapter deals with tax collection at source (TCS), which is explicitly excluded for income under this section.

Compliance Steps: ​

  1. For Investors:
    • Report income from VCCs or VCFs in the tax year it accrues or arises, even if not received.
    • Ensure proper documentation of income statements received from VCCs or VCFs.
  2. For VCCs/VCFs:
    • Prepare and furnish detailed statements of income paid or credited to investors and the tax authorities within the prescribed time.
    • Ensure accurate allocation of income proportions to investors as per their entitlement.

Examples: ​

  1. Scenario 1: An investor, Mr. A, invests ₹10 lakh in a VCF. The VCF earns ₹2 lakh as dividend income from its investments in a VCU. Even if the VCF does not distribute this income to Mr. A, it will be deemed to have been credited to him at the end of the tax year. Mr. A must include ₹2 lakh in his taxable income for that year.
  2. Scenario 2: A VCC earns ₹5 lakh as capital gains from selling shares in a VCU. It distributes ₹3 lakh to its investors, including Ms. B, who is entitled to 20% of the income. Ms. B must report ₹1 lakh (20% of ₹5 lakh) as her taxable income, even though she only received ₹60,000 (20% of ₹3 lakh) in cash.

This section ensures clarity and consistency in the taxation of income from venture capital investments, aligning it with direct investment taxation principles.