NISM Series XIX-A · Chapter 12: Taxation - India specific

L1 · Foundation

Foundation — Pass-through status, the four sections, and withholding

How residence decides the charge, the definition of an Investment Fund, what pass-through does and does not cover, the treatment of business income and losses, withholding by the AIF and by portfolio companies, and the Form 64C and 64D filings.

21 min read · Worth 5% of the paper · Written from pages 252–266 of the official NISM workbook · Updated 18 September 2026

12.1 The basic framework

In respect of investors, the basis of charge under ITA depends upon the residential status of the taxpayer during a tax year, as well as the nature of the income earned.

A person (natural or juridical) who is a resident in India is liable to taxation in India on worldwide income, subject to certain tax exemptions/deductions as may be applicable. A person who is treated as non-resident for Indian tax purposes is generally subject to tax in India only on such person's Indian-sourced income or income accrued, received or deemed to be accrued or received in India.

Resident → worldwide income. Non-resident → Indian-sourced income only. That single distinction runs through the whole chapter.

Recall from Chapter 4 that residence is tested differently under the two laws: under FEMA, the intention of stay is pertinent to prove residence but under the Income Tax Act, 1961, the physical stay is important to decide residence.

12.2 The four sections that govern AIF taxation

AIFs can be in the form of a trust, a limited liability partnership (LLP), a company or a body corporate. Majority of the AIFs are constituted as a contributory, determinate, irrevocable trust under the Indian Trusts Act, 1882.

Note the description — contributory, determinate, irrevocable — which is exactly what Chapter 5 required for tax reasons.

The taxability of Category I and II AIFs is governed by Section 10(23FBA), 10(23FBB), 194LBB and 115UB (Chapter XII – FB - Special Provisions Relating to Tax on Income of Investment Funds and Income Received from such Funds) of the ITA.

Learn all four, with what each does:

Section	What it does
115UB	Defines Investment Fund and lays down the whole pass-through scheme
10(23FBA)	Exempts the Investment Fund's non-business income at fund level
10(23FBB)	Exempts business income in the hands of the investors
194LBB	Withholding by the Investment Fund on income paid to investors

They also live in Chapter XII-FB, titled Special Provisions Relating to Tax on Income of Investment Funds and Income Received from such Funds. These are the same sections the PPM must disclose under Section XI of the template — section 10(23FBA), section 10(23FBB), 194LBB and section 115UB.

What an "Investment Fund" is

The ITA has accorded tax pass through status to 'Investment Funds' with respect to income (other than business income from investments).

The term 'Investment Fund' is defined under Section 115UB of the ITA as "any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the SEBI (Alternative Investment Fund) Regulations, 2012... or regulated under the IFSCA (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019".

Read that definition closely — three requirements travel together:

established or incorporated in India
in the form of a trust or a company or a limited liability partnership or a body corporate
granted a certificate of registration as a Category I or a Category II AIF, regulated by SEBI or by the IFSCA (Fund Management) Regulations, 2022

Therefore, Category I and II AIFs registered as trusts, or LLPs or companies would enjoy tax pass through status at fund level.

Note what is not there: Category III AIFs. They fall outside the definition of Investment Fund and outside this pass-through regime altogether. That is one of the most examinable facts in the chapter.

What pass-through means

The concept of 'tax pass through' enables zero tax liability on the income (other than business income) at Investment Fund level. The income generated by the Investment Fund, other than business income, will be taxable in the hands of the beneficiaries (investors) directly as per their respective tax status.

As per section 115UB read with section 10(23FBA) of the IT Act, any income (other than business income) earned by an Investment Fund is exempt in its hands and is chargeable to income tax directly in the hands of its investors in the same manner as if it were the income accruing or arising to, or received by, such investors had the investments been made directly by them.

That final phrase — as if... the investments been made directly by them — is the whole idea of tax neutrality from Chapter 5 written into statute. A charitable institution whose income is exempt keeps that exemption; a company taxed at company rates pays company rates. The fund is transparent.

Business income — the exception that reverses everything

As far as business income is concerned, section 115UB read with section 10(23FBB) states that such business income accruing or arising to or received by an Investment Fund is taxable at the fund level at: (a) the specified rate in Finance Act of the relevant year (where such fund is a company or firm); (b) the maximum marginal rate (in other cases); and is therefore exempt in the hands of the investors.

The two treatments are mirror images — memorise the table:

	Non-business income	Business income
At fund level	Exempt — s.10(23FBA)	Taxable — at the Finance Act rate if a company or firm; at the maximum marginal rate otherwise
At investor level	Taxable on pass-through	Exempt — s.10(23FBB)
Withholding	Yes — s.194LBB	No TDS on business income distributed to the investors

The maximum marginal rate is a punitive outcome, and it explains why the characterisation question in section 12.3.1 mattered so much before 2025.

Losses — the asymmetry

Also, as per section 115UB, any business loss at the fund level is not allowed to be passed through to its investors but is permitted to be carried forward for set-off against income of subsequent year/(s) business income in accordance with the provisions of the ITA.

Loss (other than business loss) shall be allowed to be passed through to the investors and allowed to be carried forward and set-off in the hands of the investors of the AIF where the investors has held the units of the AIF for at least 12 months.

Business loss stays at the fund. Other losses pass through — but only if the units have been held for at least 12 months. Note that the losses follow exactly the mirror of the income: business income is taxed at the fund, so business loss stays at the fund; other income passes through, so other losses pass through.

The chapter's own summary chart

At the investor level: a. Business income - Exempt. b. Interest, dividend and capital gains - taxable on pass through basis at applicable rates. c. Loss (other than business loss) - available to the investors on pass through basis if units are held for at least 12 months.

At the AIF level: a. Business income - taxable at MMR (for other than company/firm). b. Other income - exempt. c. Business loss - To be carried forward and set off at AIF level. d. TDS on income distributed to resident investors - 10% (Other than business income). e. TDS on income distributed to non-resident investors - rates in force (Other than business income). f. No TDS on business income distributed to the investors.

At the investee company level: If income distributed to the AIF is in nature of business income, withholding provisions shall apply, else no TDS on income distributed to the AIF.

12.2.1 Withholding by the AIF — Section 194LBB

As per section 194LBB of the ITA, an Investment Fund is required to withhold tax at the rate of 10% on all income (other than business income) payable to resident investors and at the rates in force [as specified in the Finance Act of the relevant year or rates specified in the applicable Double Tax Avoidance Agreement (DTAA) entered into between India and the country of residence of such non-resident investor] as applicable on all income (other than business income) payable to non-resident investors at the time of credit or payment, whichever is earlier.

Three numbers and one timing rule:

Resident investors: 10%
Non-resident investors: rates in force, per the Finance Act or the applicable DTAA
Both: only on income other than business income
Timing: at the time of credit or payment, whichever is earlier

That last phrase matters. Tax is withheld when the income is credited, even if not yet paid out.

Investors are entitled to claim credit of taxes so withheld by the Investment Fund in their respective returns of income which are to be filed under the ITA.

The relief for non-residents

As per Section 195(3), a non-resident investor can make an application to the Assessing Officer, for the grant of a certificate which authorizes such investor to receive income from the AIF, without deduction of withholding taxes or deduction at a lower rate.

Alternatively, a non-resident investor can submit a Certificate issued by a Chartered Accountant, which determines the chargeability of withholding tax, on income earned by the non-resident investor. Upon submission of above Certificate(s) by the non-resident investor, the AIF is responsible to make payments to the non-resident investor, without deducting tax or deducting tax at a lower rate as stated in the Certificate.

Two routes: a Section 195(3) certificate from the Assessing Officer, or a Chartered Accountant's certificate. Once produced, the obligation shifts — the AIF is responsible to make payments... without deducting tax or deducting tax at a lower rate as stated in the Certificate.

12.2.2 Withholding by the portfolio company

As per section 197A(1F) of the ITA and the notification issued by the Central Board of Direct Taxes (CBDT), the payer of the income to an Investment Fund is not required to withhold any taxes while paying or crediting income (other than business income) to such Investment Fund. Therefore, the fund would not suffer any withholding of taxes from its non-business income.

This is the sensible complement to pass-through. If the fund's non-business income is exempt in its hands, withholding tax at the portfolio company would simply trap cash in a refund claim. So the fund would not suffer any withholding of taxes from its non-business income.

But note the exception carried in the summary chart: If income distributed to the AIF is in nature of business income, withholding provisions shall apply.

12.2.3 Reporting under the Income Tax Act

It is mandatory for the Investment Fund to file its return of income as per the provisions of the ITA.

Even though its non-business income is exempt, the fund still files a return.

Two statements, two forms, two dates:

the statement of income paid or credited by an Investment Fund to its unit holder in a given financial year shall be furnished by the person responsible for crediting or making payment of the income on behalf of an Investment Fund and the Investment Fund to the unit holder by 30th day of June of the following financial year. The prescribed form provided for this purpose is Form No. 64C.

Similar statement is also to be furnished electronically by the Investment Fund in Form No. 64D to the jurisdictional Principal Commissioner of the Income Tax or the Commissioner of Income Tax by 15th day of June of the following financial year, under digital signature, duly verified by a practicing Chartered Accountant.

Form	To whom	By when	Extra requirement
Form 64C	the unit holder	30 June of the following financial year	duly verified by the person paying or crediting the income
Form 64D	the jurisdictional Principal Commissioner or Commissioner of Income Tax	15 June of the following financial year	electronically, under digital signature, duly verified by a practising Chartered Accountant

The rule prescribing them is Rule 12CB(1) of the Income Tax Rules, 1962.

Notice the sequence: the tax department gets its copy first (15 June), the investor second (30 June). 64D → Department. 64C → Contributor. That mnemonic is worth having, because swapping the two is the commonest error in this chapter.

Think of it like this

The courier who carries the parcel but does not own it

A courier picks up ten parcels, carries them across the country and hands each one to its addressee. Nobody would think of taxing the courier on the value of the goods — he never owned them. Each addressee is taxed, if at all, on what he receives, according to his own circumstances.

That is tax pass through: any income (other than business income) earned by an Investment Fund is exempt in its hands and is chargeable to income tax directly in the hands of its investors in the same manner as if it were the income accruing or arising to, or received by, such investors had the investments been made directly by them.

The final clause is the whole point. Two addressees on the same courier round may pay very different amounts — one is exempt, one pays at the maximum rate — and the courier's involvement changes nothing.

The one parcel the courier opens and keeps

Suppose the courier also runs a shop, and among the day's consignments one is stock he bought and is selling on his own account. That parcel is his. He is taxed on it, and the person who eventually buys it is not.

That is business income in an AIF. such business income accruing or arising to or received by an Investment Fund is taxable at the fund level at: (a) the specified rate in Finance Act of the relevant year (where such fund is a company or firm); (b) the maximum marginal rate (in other cases); and is therefore exempt in the hands of the investors.

Everything reverses for that one item — taxed at the fund, exempt for the investor, and No TDS on business income distributed to the investors. And when the shop makes a loss on it, the loss stays with the shop: any business loss at the fund level is not allowed to be passed through to its investors but is permitted to be carried forward for set-off against income of subsequent year/(s) business income.

The employer who deducts before he pays, not after

Your salary slip shows a gross figure and a smaller number credited to your bank. Nobody asks you to send tax separately in March; the employer takes it out first and gives you a certificate. At the year end you claim credit for it.

That is withholding tax — a sum deducted from any income paid — and section 194LBB puts the AIF in the employer's chair: an Investment Fund is required to withhold tax at the rate of 10% on all income (other than business income) payable to resident investors and at the rates in force... on all income (other than business income) payable to non-resident investors at the time of credit or payment, whichever is earlier.

And, just like the salary slip, it is not a final tax: Investors are entitled to claim credit of taxes so withheld by the Investment Fund in their respective returns of income.

Two receipts for the same transaction — one to the office, one to you

When a builder registers your flat, one set of papers goes to the sub-registrar and another comes to you. Both describe the same transaction; the office copy usually goes first, because the record must exist before the owner relies on it.

The AIF does exactly this at the year end. Form No. 64D goes electronically... to the jurisdictional Principal Commissioner of the Income Tax or the Commissioner of Income Tax by 15th day of June, under digital signature, duly verified by a practicing Chartered Accountant. Form No. 64C goes to the unit holder by 30th day of June of the following financial year.

64D → the Department, 15 June. 64C → the Contributor, 30 June. Fix that pairing now; swapping the two is the most common slip in this chapter.

Being taxed twice for the same day's work

A consultant in Chennai does a project for a Dubai client. Dubai says the income arose there; India says he lives here, so it is taxable here. Without a treaty he pays twice on one fee.

That is what a DTAA prevents: DTAAs are bilateral tax treaties signed by the governments of two countries that aim to avoid or eliminate double taxation of the same income in both the countries. The clash is between source based taxation and residence based taxation.

Two further rules complete the picture. First, the taxpayer takes whichever is kinder: the provisions of the ITA would apply to the extent they are more beneficial than the provisions of the DTAA (subject to GAAR provisions). Second, the treaty is no longer read alone — The MLI will apply alongside the DTAA and either supplement, complement, supersede or modify the application of the DTAA.

The society that sees through the nameplate

A man buys a flat in the name of a company whose only asset is that flat, then sells the company's shares instead of the flat, hoping no property transfer has occurred. The tax office looks at what actually changed hands.

That is the indirect transfer provision, and it comes with precise thresholds: Share or interest of a foreign company or entity should be deemed to derive its value 'substantially' from the assets located in India if on the 'specified date', the value of such Indian assets (i) exceeds INR 10 crore; and (ii) represents at least 50% of the value of all the assets owned by such foreign company or entity.

Both tests must be met, and The value of assets will have to be taken at the fair market value on the 'specified date' without reduction of liabilities.

The same instinct animates GAAR, which lets the authorities go further still — disregarding or combining or re-characterising any step of the arrangement, looking through the arrangement by disregarding any corporate structure, or re-characterising equity into debt, capital into revenue.

Key terms in this chapter

Business Loss at Fund Level: A business loss cannot be passed through to investors; it is carried forward at the fund for set-off against business income of subsequent years. Only losses other than business losses pass through, and then only where units have been held for at least 12 months.
CBDT Circular of 3 July 2019: The clarification that income of a non-resident investor from offshore investments routed through a Category I or II AIF is a deemed direct investment outside India and not taxable in India — with the corresponding rule that such a loss cannot be set off or carried forward against the AIF's income.
Common Reporting Standard (CRS): The OECD standard developed at the G20's request and approved by the OECD Council on 15 July 2014, under which jurisdictions obtain information from their financial institutions and exchange it automatically on an annual basis. India has been a signatory since 3 June 2015.
Conversion of Debentures or Preference Shares: Conversion into equity shares of the same Indian company is not a taxable transfer. The cost of acquisition of the converted instrument becomes the cost of the equity shares, and the holding period runs from acquisition of the original instrument irrespective of the date of conversion.
Deemed Credit of Undistributed Income: Income accruing to the Investment Fund during the year but not paid or credited to an investor is deemed credited to that investor on the last day of the previous year, in the proportion he would have been entitled to. It is not taxed again when actually paid.
Eight Year Carry Forward: Unit holders may carry forward passed-through losses in their own returns until the expiry of eight years from the year the loss was first incurred by the investment fund, and such losses are then unavailable to the fund itself.
FATCA: The Foreign Account Tax Compliance Act, introduced in the US Internal Revenue Code in 2010 to counter offshore tax abuse. India signed the exchange agreement on 9 July 2015, effective 31 August 2015, to report US reportable accounts held in Indian financial institutions.
Feeder Fund: A vehicle in a foreign jurisdiction pooling contributions from offshore investors, which then contributes to the domestic AIF. It enables lighter tax compliance in India at feeder fund level rather than at individual offshore investor level.
Finance Act 2025 Amendment to Section 2(14): The amendment specifically including securities dealt with by SEBI or IFSC Authority registered Category I and II AIFs within the definition of capital asset, so that transfer gains are taxed as capital gains and not business income from the financial year beginning 1 April 2025.
Form 64C and Form 64D: Form 64C is the statement of income paid or credited, furnished to the unit holder by 30 June of the following financial year. Form 64D is the corresponding statement filed electronically with the jurisdictional Principal Commissioner or Commissioner of Income Tax by 15 June, under digital signature and verified by a practising Chartered Accountant.
GAAR Re-characterisation Powers: Powers including disregarding or combining steps of an arrangement, treating an accommodating party and another as one person, relocating a party's residence or an asset's situs, looking through corporate structures, and re-characterising equity into debt or capital into revenue.
General Anti-Avoidance Rules (GAAR): Provisions in Chapter X-A of the Income Tax Act, applicable to income accruing on or after 1 April 2017, allowing tax authorities to deny benefits of impermissible avoidance arrangements. They override tax treaty provisions where invoked.
GST on Fund Services: Goods and Services Tax applies to services provided by the investment manager and the trustee to the fund, being levied on the investment management fee and the trusteeship fees.
Impermissible Avoidance Arrangement: An arrangement whose main purpose is to obtain a tax benefit and which also satisfies at least one of four tests — non-arm's-length rights or obligations, misuse or abuse of the Act, lack of commercial substance, or means not ordinarily employed for bona fide purposes.
Indirect Transfer Provisions: Under Section 9, transfer of shares or interest in an offshore entity is taxable in India where the entity derives its value substantially from Indian assets — meaning those assets exceed Rs 10 crore and represent at least 50 per cent of total assets, valued at fair market value on the specified date without reduction of liabilities.
Investment Fund (Section 115UB): A fund established or incorporated in India as a trust, company, LLP or body corporate, holding a certificate of registration as a Category I or Category II AIF under the SEBI (AIF) Regulations, 2012 or regulated under the IFSCA (Fund Management) Regulations, 2022. Category III AIFs fall outside this definition.
Maximum Marginal Rate on Business Income: Business income of an Investment Fund is taxed at the fund level — at the Finance Act rate if the fund is a company or firm, and at the maximum marginal rate in any other case, including the trust form most Indian AIFs use.
Minimum Alternate Tax (MAT): The levy under Section 115JB to which corporate beneficiaries of an AIF remain subject, notwithstanding that pass-through income may be exempt in their hands.
Multilateral Instrument (MLI): An OECD-sponsored multilateral treaty enabling countries to modify their bilateral tax treaties swiftly to counter tax avoidance and treaty shopping. It applies alongside a DTAA and may supplement, complement, supersede or modify it.
Section 10(23FBA): The provision exempting an Investment Fund's income other than business income in the fund's own hands, so that it flows through to investors.
Section 10(23FBB): The provision exempting, in the hands of unit holders, business income that has already been taxed at the Investment Fund level.
Section 10(34A) Buy-back Exemption: Gains on buy-back of shares by a domestic company on or before 30 September 2024 were exempt in investors' hands. Where the buy-back takes place on or after 1 October 2024, the gains are taxable in the investors' hands.
Section 194LBB: The withholding provision requiring an Investment Fund to deduct 10 per cent on non-business income payable to resident investors and the rates in force on such income payable to non-residents, at the time of credit or payment, whichever is earlier.
Section 195(3) Certificate: A certificate a non-resident investor may obtain from the Assessing Officer authorising receipt of income from an AIF without withholding or at a lower rate. A Chartered Accountant's certificate determining chargeability is an alternative route.
Section 197A(1F): The provision under which a payer of income to an Investment Fund need not withhold tax on income other than business income, so the fund suffers no withholding on its non-business income.
Section 56(2)(x): Where property, including securities, is acquired below fair market value and the difference exceeds Rs 50,000, that difference is taxable in the recipient's hands as other income.
Section 90(2) Beneficial Provision Rule: The provisions of the Income Tax Act apply to the extent they are more beneficial than those of the applicable DTAA — subject, however, to the GAAR provisions.
Short-term and Long-term Capital Gains: Distinguished by the period of holding. Short-term gains are taxed like any other income, while long-term gains receive concessional treatment. Short-term capital losses may be set off against either STCG or LTCG, but long-term capital losses only against LTCG.
Source Based and Residence Based Taxation: The two competing claims a DTAA resolves — tax in the country where the income arises, and tax in the country where the recipient resides. Without a treaty the same income can be taxed twice.
Stamp Duty on Units: Following Finance Act 2019 amendments to the Indian Stamp Act, 1899, stamp duty applies to issue, transfer and sale of units of the fund, with Registrars to Issue and Share Transfer Agents notified as collecting agents.
Tax Pass Through: Zero tax liability at the Investment Fund level on income other than business income, which is instead chargeable directly in the investors' hands in the same manner as if the investments had been made directly by them.
Tax Residency Certificate (TRC): A certificate issued by the tax authorities of an investor's country of residence, renewable annually, without which a non-resident cannot claim relief under a DTAA. Form 10F supplies any prescribed information the TRC itself does not contain.

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Original explanatory writing based on the official NISM workbook for Series XIX-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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