Income Tax 2025

Appearance

Tax on income of unit holder and business trust. ​

223(1) ​

Irrespective of anything contained in any other provisions of this Act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust.

223(2) ​

Subject to the provisions of sections 196 and 197, the total income of a business trust shall be charged to tax at the maximum marginal rate.

223(3) ​

If in any tax year, the distributed income or any part thereof, received by a unit holder from the business trust is of the nature as referred to in Schedule V (Table: Sl. No. 3) or (Table: Sl. No. 4), then, such distributed income or part thereof shall be deemed to be income of such unit holder and shall be charged to tax as income of the tax year.

223(4) ​

The provisions of sub-section (1) shall not apply in respect of any sum referred to in section 92(2)(k) received by a unit holder from a business trust.

223(5) ​

Any person responsible for making payment of the income distributed on behalf of a business trust to a unit holder, shall furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner, as prescribed, giving the details of the nature of the income paid during the tax year and such other details, as prescribed.

Explanation

Section Summary: ​

This section deals with the taxation of income distributed by a business trust to its unit holders. It clarifies how such income is treated in the hands of the unit holders and the tax implications for both the business trust and the unit holders. The section ensures that the nature of income (e.g., capital gains, interest, etc.) remains the same when distributed to unit holders as it was in the hands of the business trust.

Key Changes: ​

  1. Deemed Nature of Income: The income distributed by a business trust retains its original nature (e.g., capital gains, interest) in the hands of the unit holder. This is a clarification to avoid ambiguity in classification.
  2. Taxation of Business Trust: The total income of the business trust is taxed at the maximum marginal rate, unless specific exemptions under Sections 196 or 197 apply.
  3. Specific Income Types: If the distributed income falls under Schedule V (Table: Sl. No. 3 or 4), it is treated as the unit holder's income and taxed accordingly.
  4. Exclusion for Certain Sums: Income referred to in Section 92(2)(k) (e.g., certain exempt sums) is excluded from the application of this section.
  5. Reporting Requirements: The person responsible for distributing income must provide a detailed statement to the unit holder and the prescribed authority, specifying the nature of the income distributed.

Practical Implications: ​

  1. For Unit Holders:
    • The income they receive from the business trust will be taxed based on its original nature (e.g., capital gains taxed as capital gains, interest as interest).
    • They must report this income in their tax returns under the appropriate head.
  2. For Business Trusts:
    • The trust's total income is taxed at the maximum marginal rate, which could increase its tax liability unless exemptions apply.
    • The trust must ensure proper classification and reporting of income distributed to unit holders.
  3. For Compliance Officers:
    • They must prepare and submit detailed statements to unit holders and the tax authorities, specifying the nature of the income distributed.

Critical Concepts: ​

  1. Business Trust: A trust that manages income-generating assets (e.g., infrastructure projects, real estate) and distributes income to unit holders.
  2. Unit Holder: An investor who holds units in the business trust, similar to a shareholder in a company.
  3. Maximum Marginal Rate: The highest tax rate applicable under the Income Tax Act (currently 30% for individuals and 25%/30% for companies, plus surcharge and cess).
  4. Schedule V (Table: Sl. No. 3 or 4): Refers to specific types of income (e.g., dividends, interest) that are taxed differently under the Income Tax Act.
  5. Section 92(2)(k): Pertains to certain exempt sums, which are excluded from the application of this section.

Compliance Steps: ​

  1. For Business Trusts:
    • Classify income correctly before distribution to unit holders.
    • Pay tax on total income at the maximum marginal rate, unless exempt under Sections 196 or 197.
    • Prepare and furnish a statement to unit holders and the tax authority, detailing the nature of income distributed.
  2. For Unit Holders:
    • Report the distributed income in their tax returns under the appropriate head (e.g., capital gains, interest).
    • Ensure they receive the statement from the business trust for accurate reporting.

Examples: ​

  1. Scenario 1: A business trust earns ₹10 lakh as capital gains and ₹5 lakh as interest. It distributes ₹8 lakh to unit holders. The unit holders will receive the income in the same proportion (e.g., ₹5.33 lakh as capital gains and ₹2.67 lakh as interest) and will be taxed accordingly.
  2. Scenario 2: If the distributed income includes ₹2 lakh under Schedule V (Table: Sl. No. 3), this amount will be treated as the unit holder's income and taxed as per the applicable rates for that income type.

This section ensures clarity in taxation for both business trusts and unit holders, while imposing stricter compliance requirements for reporting and classification.