Section 222 · Special cases
Section 222 of the Income-tax Act, 2025 — Tax on Income of Venture Capital Undertakings (Pass-Through Taxation)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 222, Income-tax Act 2025
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.
(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 com-
pany or venture capital fund shall furnish, within such time, 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 the prescribed form and verified in the pre-
scribed 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.
(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.
(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.
(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.
(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.
(7) Nothing contained in this section shall apply in respect of any income accruing
or ari
In plain language
What Section 222 is about
Section 222 of the Income-tax Act, 2025 lays down the "pass-through" tax rule for income earned through a Venture Capital Company (VCC) or a Venture Capital Fund (VCF). In plain words, when you invest in a registered venture capital fund and that fund puts your money into start-ups or growing companies (called Venture Capital Undertakings, or VCUs), the profit is not taxed at the fund level — instead it is taxed directly in your hands as an investor, exactly as if you had invested in those companies yourself.
This section is the direct successor of Section 115U of the old Income-tax Act, 1961. The wording has been modernised and simplified, but the core principle is unchanged.
Who it applies to
- Venture Capital Companies and Venture Capital Funds registered with SEBI (today these operate largely as Category I Alternative Investment Funds under the SEBI AIF Regulations, 2012).
- Investors — individuals, HUFs, companies, trusts or institutions — who hold units or shares in such a VCC/VCF.
- Venture Capital Undertakings (VCUs) — the actual operating businesses/start-ups the fund invests into.
How the pass-through works
- Taxed as if invested directly: Income arising to you out of investments in a VCC/VCF is charged to tax in your hands in the same manner as if you had invested straight into the underlying VCU.
- Character is preserved: If the fund earned long-term capital gains, dividends and interest, you are treated as having earned long-term capital gains, dividends and interest in the same proportion. The nature of income is not converted into something else on the way to you.
- Accrual basis — no deferral: Income is taxable when it accrues or arises to the fund, not only when it is actually paid out to you. Undistributed income is deemed to have been credited to investors at the year-end in proportion to their entitlement.
- No double taxation: Income already taxed on accrual is not taxed again when it is actually distributed later.
Reporting — Form 74 and Form 75
- The VCC/VCF must furnish a statement of income paid or credited to each investor. Under the 2025 framework this is Form 75 (a per-investor statement), auto-generated from the fund's master Form 74 on the income-tax e-filing portal.
- Form 75 must be issued to investors on or before 30 June of the financial year immediately following the tax year in which the income was distributed/credited.
- Investors use Form 75 to correctly report each income component in their ITR (typically ITR-2, ITR-3, ITR-5, ITR-6 or ITR-7).
How it interacts with other provisions
- The fund's own income is exempt at the fund level (the successor exemption to the old Section 10(23FB)); Section 222 then routes it to investors.
- Applicable rates depend on the character of each stream — e.g. capital gains taxed under the relevant capital-gains sections, dividends/interest at your slab, etc. Section 222 does not itself fix a single flat rate; it decides who is taxed and on what character of income.
- This regime is separate from Section 115UB (2025 successor) which governs Category I and II AIFs generally — the two must not be confused.
Practical implications
- You may have to pay tax on your share of the fund's profit even in a year when the fund has not actually paid you any cash, because taxation follows accrual.
- Keep every Form 75 carefully — it is your proof of the character and quantum of income to declare.
- The regime is a genuine tax efficiency: profit is taxed only once, in your hands, avoiding a layer of tax at the fund.
💡 Example
Worked example 1 — proportionate character. Suppose a SEBI-registered VCF earns during the tax year ₹10 crore of long-term capital gains, ₹2 crore of interest and ₹50 lakh of dividends. Ms. Ananya holds 5% of the units of the fund. Under Section 222 she is treated as having earned 5% of each stream: ₹50 lakh long-term capital gains, ₹10 lakh interest and ₹2.5 lakh dividend. Each part is taxed in her return at the rate applicable to that character — the LTCG under the capital-gains rules, the interest and dividend at her slab. The fund pays no tax on this income.
Worked example 2 — accrual even without payout. A fund books ₹4 crore of interest income in the tax year 2026-27 but decides to reinvest and distributes nothing. Investor Mr. Rao, holding 10%, is still deemed to have received ₹40 lakh and must offer it to tax in AY 2027-28 based on his Form 75, even though no money reached his bank account. When the fund actually pays it out in a later year, it is not taxed again.
A short story. Rahul, a Jaipur doctor, invested ₹25 lakh in a start-up focused venture capital fund. He assumed he would only pay tax "when the fund sends me money." In June he received a Form 75 showing ₹1.8 lakh of accrued interest and gains for the year — nothing had hit his account yet. His CA explained Section 222: the fund is a pass-through, so his share is taxed as it accrues, keeping its original character. Rahul declared it correctly and avoided a mismatch notice from the department.
| Feature | Section 222, Income-tax Act 2025 | Section 115U, Income-tax Act 1961 (old) |
|---|
| Core principle | Pass-through — income taxed in investor's hands | Same pass-through principle |
| Entities covered | Venture Capital Company / Venture Capital Fund / VCU | Same (defined via old Section 10(23FB)) |
| Character of income | Preserved and passed in same proportion | Preserved and passed in same proportion |
| Timing | Accrual basis; undistributed income deemed credited at year-end | Accrual basis; deemed credited at year-end |
| Fund-level tax | Exempt (successor to 10(23FB)); no double tax | Exempt under 10(23FB); no double tax |
| Investor statement | Form 75 (from Form 74), by 30 June following the tax year | Statement under Rule 12C |
| Single flat rate? | No — rate follows character of each income stream | No — same approach |
Related sections
Section 115UB — Tax on income of investment funds (Category I & II AIFs) Section 10(23FB) — Exemption of income of venture capital funds Section 112 — Tax on long-term capital gains Section 111A — Tax on short-term capital gains on listed securities Section 194LBB — TDS on income from investment funds Section 56 — Income from other sources (interest, dividends)
Frequently asked questions
Does the venture capital fund pay tax on its own income under Section 222?
No. The fund enjoys pass-through status, so its income is exempt at the fund level and is instead taxed directly in the hands of the investors. This prevents the same income being taxed twice.
Which section of the old Income-tax Act, 1961 does Section 222 replace?
Section 222 of the Income-tax Act, 2025 is the successor to Section 115U of the 1961 Act. The pass-through principle and character-preservation rule are carried forward largely unchanged.
Can I be taxed on venture capital income even if the fund did not pay me any money?
Yes. Taxation follows accrual, so your proportionate share of the fund's income is taxable in the year it accrues, even if it is retained and not distributed. It is not taxed again when actually paid out later.
What is Form 75 and why does it matter?
Form 75 is the investor-wise statement of income distributed or credited by a VCC/VCF, auto-generated from the fund's Form 74. It shows the amount and character of each income stream so you can report it correctly in your ITR; it must reach you by 30 June of the year following the tax year.
Does Section 222 give one flat tax rate on venture capital income?
No. Section 222 only decides who is taxed and preserves the character of income. Each component — capital gains, interest, dividend — is then taxed at the rate applicable to that character in your own return.
Which funds qualify for pass-through under Section 222?
Only venture capital companies and funds registered with SEBI that meet the prescribed conditions (today largely SEBI-registered Category I Alternative Investment Funds). Income from investments not satisfying these conditions may not enjoy pass-through treatment.
How is this different from Section 115UB for AIFs?
Section 222 is the specific venture capital pass-through regime, while Section 115UB governs Category I and II Alternative Investment Funds more broadly. They overlap in the AIF world but are distinct provisions and should not be mixed up.
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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