Section 224 · Special cases
Section 224 of the Income-tax Act, 2025 — Tax on Income of Investment Fund and Its Unit Holders (AIF Pass-Through Taxation)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 224, Income-tax Act 2025
224. (1) Irrespective of anything contained in any other provision of this Act and
subject to the provisions of this section, where a person, being a unit holder of
an investment fund, out of investments made in the investment 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 the investments made by the investment fund been
made directly by him.
(2) Where in any tax year, the net result of computation of total income of the
investment fund, without giving effect to the provisions of Schedule V (Table: Sl. No.
1), is a loss under any head of income and such loss cannot be or is not wholly set
off against income under any other head of income of the said tax year, then out
of such loss,—
(a) the loss arising to the investment fund as a result of the computation
under the head “Profits and gains of business or profession”, if any, shall
be—
(i) allowed to be carried forward and it shall be set off by the invest-
ment fund as per the provisions of Chapter VII; and
(ii) ignored for the purposes of sub-section (1);
(b) the loss other than the loss referred to in clause (a), if any, shall also be
ignored for the purposes of sub-section (1), if such loss has arisen in
respect of a unit which has not been held by the unit holder for at least
twelve months.
(3) The loss other than the loss under the head “Profits and gains of business or
profession”, if any, accumulated at the level of investment fund as on the 31st March,
2019, shall be—
(a) deemed to be the loss of a unit holder who held the unit on the 31st March,
2019 in respect of the investments made by him in the investment fund,
in the same manner as provided in sub-section (1); and
(b) allowed to be carried forward by such unit holder for the remaining
period calculated from the year in which the loss had occurred for the
first time taking that year as the first year and shall be set off by him as
per the provisions of Chapter VII.
(4) The loss so deemed under sub-section (3) shall not be available to the investment
fund on or after the 1st April, 2019.
(5) The income paid or credited by the investment fund shall be deemed to be of
the same nature and in the same
In plain language
What Section 224 is about
Section 224 of the Income-tax Act, 2025 lays down the "pass-through" tax regime for Category I and Category II Alternative Investment Funds (AIFs) and their investors (called "unit holders"). It is the re-numbered and re-drafted version of the old Section 115UB of the Income-tax Act, 1961, and the substance is almost identical.
The core idea is simple: an investment fund is treated as a tax-transparent vehicle. Instead of the fund paying tax on the capital gains, dividends and interest it earns, that income is passed through to the unit holders and taxed in their hands — exactly as if each investor had made those investments directly. This avoids double taxation (fund + investor) on the same rupee of income.
Who it applies to
- Investment fund means a fund holding a certificate of registration as a Category I or Category II AIF under the SEBI (Alternative Investment Funds) Regulations, 2012, or a fund regulated under the IFSCA (Fund Management) Regulations, 2022 (GIFT City funds). The fund may be set up as a trust, company, LLP or body corporate.
- Category III AIFs (hedge-fund style, listed-derivative trading) are NOT covered by this pass-through — they are taxed differently, usually at the fund level.
- Unit holder means the investor holding a unit — the beneficial interest in the fund.
Key rules — how the income is split
- Non-business income passes through: Capital gains, dividends, interest and other non-business income are taxed directly in the hands of unit holders, in the same proportion as their holding, and retain their original character (a long-term capital gain stays a long-term capital gain in your ITR).
- Business income is taxed at the fund level: If the fund itself earns business/profession income, that is taxed in the fund's own hands at the applicable rate — and is exempt in the unit holder's hands under Schedule V. This prevents double taxation but also means investors cannot use fund business losses.
- Fund-level tax rate: Where the fund is a company or firm, business income is taxed at the rates for that entity; in any other case it is taxed at the maximum marginal rate (MMR).
- Deemed credit: Even if the fund does not actually distribute the income, it is deemed to have been credited to unit holders on the last day of the tax year in the same proportion — so you may have to pay tax on income you have not yet received in cash (accrual basis).
- No double taxation on later payout: Income already taxed on accrual is not taxed again when the fund actually pays it out later.
Treatment of losses
- Business losses of the fund are carried forward and set off at the fund level (under the Chapter VII / set-off and carry-forward rules); they do not pass through to investors.
- Short-term (units held under 12 months): Losses attributable to units held for less than 12 months are ignored for pass-through — a rule to stop artificial loss shopping.
- Other (non-business) losses generally pass through to unit holders for set-off, subject to conditions.
- Legacy losses up to 31 March 2019 accumulated at the fund level are deemed to be the losses of the then unit holders, who may carry them forward personally.
TDS and compliance
- TDS on distributions: The fund must deduct tax when it credits or pays income (other than business income) to unit holders — under Section 393(1) of the 2025 Act (the successor to the old Section 194LBB). Rate is 10% for residents; for non-residents, rates in force / Section 195 apply, subject to DTAA relief.
- Statements: The fund must furnish Form 64D to the income-tax authorities and issue Form 64C to each unit holder, detailing the nature and amount of income and TDS. Form 64C is the key document you use to report AIF income in your return.
Practical implications
- You are taxed on your share of fund income even without a cash payout — plan liquidity for the tax outgo.
- Match every line in your ITR to your Form 64C so the character (LTCG/STCG/dividend/interest) and TDS credit are correct.
- Interacts closely with Section 223 (business trusts / REITs & InvITs pass-through), Schedule V (exemptions), and the capital-gains and dividend-taxation sections.
💡 Example
Worked example 1 — capital gains pass-through. A Category II AIF has 100 unit holders holding equally (1% each). During the year the fund earns ₹5 crore of long-term capital gains and ₹1 crore of dividends. Under Section 224 this ₹6 crore passes through. Each 1% unit holder is taxed on ₹5 lakh LTCG and ₹1 lakh dividend — in their own hands, at their own slab/rate — even if the fund reinvests and pays nothing out. The LTCG stays LTCG (eligible for the applicable LTCG rate), and the dividend is taxed at slab.
Worked example 2 — TDS and deemed credit. Ravi holds 2% of the same AIF. His share of pass-through income (excluding business income) is ₹12 lakh. The fund deducts TDS at 10% under Section 393(1) = ₹1,20,000 and issues Form 64C. Ravi reports ₹12 lakh in his ITR under the correct heads, and claims the ₹1,20,000 as TDS credit. Because the income was taxed on accrual this year, when the fund actually pays the cash next year it is not taxed again.
Relatable story. Meena, a doctor in Jaipur, invested ₹50 lakh in a Category I venture AIF. In March she was surprised to get a Form 64C showing ₹3 lakh of capital gains "credited" to her — even though she had received no money. Her CA explained Section 224: the fund is only a conduit, so the gains are hers to tax the moment they accrue. Meena paid the tax from other funds and kept the Form 64C safely to claim the TDS credit and prove she would not be taxed again when the cash finally arrives.
| Type of income at fund | Taxed in whose hands | Character retained? | TDS |
|---|
| Capital gains (LTCG/STCG) | Unit holder (pass-through) | Yes — stays LTCG/STCG | 10% u/s 393(1) for residents |
| Dividend income | Unit holder (pass-through) | Yes — taxed as dividend | 10% for residents |
| Interest income | Unit holder (pass-through) | Yes — taxed as interest | 10% for residents |
| Business / profession income | Fund itself | Exempt in unit holder's hands | Not applicable (taxed at fund) |
| Business income — fund tax rate | Company/firm: entity rate; else MMR | — | — |
Related sections
Section 223 — Tax on income of business trusts (REITs/InvITs) and unit holders Section 393 — TDS on income in respect of units of an investment fund Schedule V — Incomes not included in total income of investment funds and unit holders Section 195 — TDS on payments to non-residents (with DTAA relief) Section 198 — Capital gains chargeable to tax Section 2 — Definitions (investment fund, unit, AIF)
Frequently asked questions
Does the investment fund pay tax, or do I as the investor?
For capital gains, dividends and interest the fund is a pass-through — you as the unit holder pay the tax in your own hands. Only business income earned by the fund is taxed at the fund level and is then exempt for you.
Which funds are covered by Section 224?
Only Category I and Category II AIFs registered with SEBI, and IFSCA-regulated funds in GIFT City. Category III AIFs are NOT covered by this pass-through and are generally taxed at the fund level.
Do I pay tax even if the fund does not distribute any money to me?
Yes. Income not distributed is deemed credited to you on the last day of the tax year in proportion to your holding, so you are taxed on accrual even without a cash payout.
Will I be taxed again when the fund finally pays out the cash?
No. Income already included in your total income on accrual is not taxed again in the year it is actually paid to you by the fund.
What TDS is deducted and at what rate?
The fund deducts TDS under Section 393(1) at 10% for residents when it credits or pays income (other than business income). For non-residents, rates in force / Section 195 apply, subject to DTAA relief.
What is Form 64C and why does it matter?
Form 64C is the annual statement the fund issues to you showing your share of income by category and the TDS deducted. It is the key document for correctly reporting AIF income and claiming TDS credit in your ITR; the fund also files Form 64D with the tax authorities.
Does the character of income change when it passes through?
No. A long-term capital gain remains a long-term capital gain, a dividend stays a dividend, and interest stays interest in your hands — so the applicable rate for each head continues to apply.
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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