Section 221 · Special cases
Section 221 of the Income-tax Act, 2025 — Tax on Income from Securitisation Trusts
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 221, Income-tax Act 2025
221. (1) Irrespective of anything contained in this Act, where a person being an
investor of a securitisation trust, receives any income or any income accrues
or arises to him, out of investments made in the securitisation trust, 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 the investments by the
securitisation trust been made directly by him.
(2) The income paid or credited by the securitisation trust 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 if it had been received by, or had accrued or arisen to, the
securitisation trust during the tax year.
(3) The income accruing or arising to, or received by, the securitisation trust during
a tax year, 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.
(4) The person responsible for crediting or making payment of the income on behalf
of securitisation trust, and the securitisation trust, shall furnish, within such period,
as may be prescribed, to the person who is liable to tax in respect of such income
and to the prescribed income-tax authority, a statement in such form and verified
in such manner, giving details of the nature of the income paid or credited during
the tax year and such other relevant details, as may be prescribed.
(5) Any income which has been included in the 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 securitisation trust.
(6) For the purposes of this section,—
(a) “investor” means a person who is holder of any securitised debt instru-
ment or securities or security receipt issued by the securitisation trust;
(b) “securities” means debt securities issued by a Special Purpose Vehicle as
referred to in the guidelines on securitisation of standard assets issued
by the Reserve Bank of India;
(c) “securitised debt instrument”65 shall have the same meaning as assi
In plain language
What Section 221 actually deals with
Section 221 of the Income-tax Act, 2025 lays down how income from a securitisation trust is taxed in the hands of its investors. It is the re-drafted successor to Section 115TCA of the old Income-tax Act, 1961, and it keeps the same core idea: a securitisation trust is treated as a "pass-through" (tax-transparent) vehicle. The trust itself does not pay tax on the income it earns from the pooled loan assets; instead, that income flows through to the investors and is taxed directly in their hands.
- What is a securitisation trust? It is a special purpose entity that buys a pool of loans/receivables (home loans, auto loans, credit-card dues, etc.) from banks/NBFCs and issues pass-through certificates (PTCs), securitised debt instruments, or security receipts to investors. It must be regulated by SEBI or the RBI (or be a trust set up by a securitisation/reconstruction company under the SARFAESI framework).
- Who is an "investor"? Any person holding a securitised debt instrument, security, or security receipt issued by the trust — typically banks, mutual funds, insurers, and increasingly HNIs/institutions.
The pass-through principle explained simply
The key rule in sub-section (1) is that income received by an investor from the trust is taxed "as if the investor had directly made the underlying investment himself." In other words, the trust is looked through, and the investor is taxed as though he directly lent to the borrowers.
- Same nature, same proportion: Sub-section (2) preserves the character of the income. If the trust's income is interest income, it stays interest income in the investor's hands; if part is capital gain, it stays capital gain. Nothing is re-characterised as a single "distribution".
- Deemed credit for accrued-but-unpaid income: If income accrues to the trust but is not actually paid out to investors during the year, it is deemed to be credited to the investor on the last day of the tax year, in proportion to his holding. So investors are taxed on accrual, not merely on receipt.
- No double taxation: Income already taxed on accrual is not taxed again in the later year when the cash is actually paid out.
Trust-level exemption + investor-level tax
Section 221 works together with the exemption for the trust's own income (the 2025 Act's successor to the old Section 10(23DA) exemption). The income is exempt at the trust level and taxed only once, at the investor level. This avoids the layered taxation that a normal trust or company would suffer.
TDS on the distribution — Section 393(1) (old 194LBC)
When the trust credits or pays income to investors, it must deduct TDS under the 2025 Act's Section 393(1) (the successor to Section 194LBC):
- Resident investors: generally 10% (rising to 20% if PAN is not furnished), with no threshold — TDS applies on the whole income.
- Non-resident investors: at the rates in force — broadly 30% for non-corporate and 35% for foreign companies (plus applicable surcharge and cess, subject to any tax-treaty relief).
The investor gets full credit for the TDS while filing the return, so it is not an extra cost — just tax collected in advance.
Who is affected and practical implications
- Investors must report the pass-through income under the correct head (usually interest / other sources), matching the statement the trust is required to furnish to them and to the tax department.
- The trust / paying person must issue the prescribed income statement within the prescribed time and deduct TDS correctly.
- Because income is taxed on accrual, investors may have a tax liability even in a year where little cash was received.
💡 Example
Worked example 1 — Resident investor. Suppose a securitisation trust holds a pool of home loans and earns interest income for the year. Mr. Sharma holds 5% of the trust's PTCs. The trust's distributable income attributable to his holding is ₹8,00,000, of which ₹6,00,000 is paid out during the year and ₹2,00,000 accrues but is not paid. Under Section 221, Mr. Sharma is taxed on the full ₹8,00,000 (the unpaid ₹2,00,000 is deemed credited on the last day of the year). If Mr. Sharma is in the 30% slab, his tax is roughly ₹2,40,000 (plus cess). The trust deducts TDS at 10% = ₹80,000 under Section 393(1), and Mr. Sharma claims that ₹80,000 as credit, paying the balance himself.
Worked example 2 — Character preserved. Assume the ₹8,00,000 comprises ₹7,00,000 interest and ₹1,00,000 short-term capital gain realised by the trust on selling part of the pool. In Mr. Sharma's return, ₹7,00,000 stays as interest income and ₹1,00,000 stays as short-term capital gain — the trust cannot convert the capital gain into ordinary income. This "same nature, same proportion" rule is the heart of the pass-through.
A relatable story. Think of a securitisation trust like a shared water tank on a street. Several households (investors) contribute to buying it, and it collects rainwater (loan repayments from borrowers). The tank itself is not charged a water tax — instead, each household is charged based on the water it is entitled to draw, exactly as if it had collected the rain in its own bucket. Even if a household hasn't yet carried its share home by 31 March, it is still counted as "theirs" for the year. Section 221 is simply the rulebook that says "tax the households, not the tank, and tax each for their own share in its true form."
| Aspect | Position under Section 221 (2025 Act) |
|---|
| Old-law equivalent | Section 115TCA of the Income-tax Act, 1961 |
| Tax at trust level | Exempt (pass-through; successor to old Section 10(23DA)) |
| Tax at investor level | Taxed as if investor invested directly; character preserved |
| Timing of taxation | On receipt, or deemed credited on last day of tax year if unpaid |
| Double taxation | Accrued income not taxed again when later paid |
| TDS — resident (Sec 393(1) / old 194LBC) | 10% (20% if no PAN); no threshold |
| TDS — non-resident | Rates in force: ~30% non-corporate / ~35% foreign company (+ surcharge & cess; treaty relief possible) |
| Reporting | Trust must furnish income statement to investor and to tax authority in prescribed form/time |
Related sections
Section 393 — TDS on income from securitisation trust (old 194LBC) Section 224 — Tax on income from investment funds (pass-through) Section 223 — Tax on income of business trusts (REITs/InvITs) Section 222 — Tax on income of unit holders and business trusts Section 115TCA (1961 Act) — Predecessor provision for securitisation trusts Schedule VII / exemptions — Income of securitisation trust (old Section 10(23DA))
Frequently asked questions
Does the securitisation trust pay any income tax itself?
No. The trust's income is exempt at the trust level, and Section 221 taxes it directly in the hands of the investors on a pass-through basis. This ensures the income is taxed only once.
Is Section 221 the same as the old Section 115TCA?
Yes, in substance. Section 221 of the Income-tax Act, 2025 is the redrafted successor to Section 115TCA of the 1961 Act and retains the same pass-through mechanism, character-preservation rule, and anti-double-taxation safeguard.
What TDS rate applies when the trust pays me income?
For resident investors, TDS is generally 10% under Section 393(1) (the old 194LBC), rising to 20% if PAN is not provided, with no threshold. Non-residents face higher rates (broadly 30% non-corporate / 35% foreign company plus surcharge and cess), subject to treaty relief.
Can I claim credit for the TDS deducted by the trust?
Yes. The TDS deducted is fully creditable against your final tax liability when you file your return, so it is only advance collection, not an additional tax.
What if the trust earns income but does not pay it out to me this year?
You are still taxed on it. Any income that accrues to the trust but is not paid is deemed to have been credited to you on the last day of the tax year, in proportion to your holding.
Does the nature of income change when it passes through the trust?
No. Section 221 preserves the same nature and proportion of income. Interest stays interest and capital gains stay capital gains in your hands, exactly as if you had made the underlying investment directly.
Will I be taxed twice — once on accrual and again when I receive the money?
No. Section 221 specifically provides that income already included in your total income on accrual will not be taxed again in the year it is actually paid to you.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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