Sections 223 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 223 deals with the income of a business trust and of its unit holders. Section 224 deals with an investment fund, being a Category I or Category II Alternative Investment Fund, and its unit holders. Both are pass-through provisions in Part F of Chapter XIII. This article explains them as per the Income-tax Act, 2025 as amended by the Finance Act, 2026.
Income distributed by a business trust keeps the same nature and proportion in the unit holder's hands, while the trust itself is charged at the maximum marginal rate, subject to sections 196, 197 and 198. A unit holder of an investment fund is taxed as if he had invested directly; the fund's business loss stays with the fund, and other losses pass to the unit holder only if the unit was held for at least twelve months. Both must give a statement as prescribed.
By section 1(3), the Act is in force from 1 April 2026, save as otherwise provided. No Finance Act, 2026 amendment is named for these two sections. Later amendments, rules and notifications should be checked. For fund and trust structuring questions, see our tax planning advisory page.
Section 223: business trusts and unit holders
| Sub-section | What it says |
|---|---|
| (1) | Irrespective of anything in any other provision, income distributed by a business trust to its unit holders is deemed to be of the same nature and in the same proportion in the unit holder's hands as it was received by, or accrued to, the business trust |
| (2) | Subject to sections 196, 197 and 198, the total income of a business trust is charged to tax at the maximum marginal rate |
| (3) | If the distributed income, or part of it, received by a unit holder is of the nature referred to in Schedule V (Table: serial number 3) or (Table: serial number 4), it is deemed to be income of the unit holder and is charged to tax as income of the tax year |
| (4) | Sub-section (1) does not apply to any sum referred to in section 92(2)(k) received by a unit holder from a business trust |
| (5) | The person responsible for paying the distributed income on behalf of a business trust must furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner as prescribed, giving the nature of income paid in the tax year and other prescribed details |
Reading the sub-sections
Sub-section (1) is the flow-through rule. The unit holder receives what the trust received, in the same character and the same proportion.
Sub-section (2) charges the trust itself at the "maximum marginal rate", but "subject to the provisions of sections 196, 197 and 198". Those three sections sit in the capital gains part of Chapter XIII; see our posts on section 196, section 197 and section 198. The Act does not print the maximum marginal rate in this section.
Sub-section (3) operates through Schedule V. Whether a distribution is of the nature in serial number 3 or serial number 4 of that Schedule is to be read in the Schedule itself; see our articles on Schedule V, investment funds, business trusts and venture capital income and on income of specified persons from investments in India.
Sub-section (4) carves out a sum referred to in section 92(2)(k). The content of that clause is for the reader to check in section 92; see our note on income from other sources under section 92.
Sub-section (5) leaves the time, form and manner of the statement to the Income-tax Rules, 2026.
Section 224: investment funds and unit holders
Meaning of investment fund, sub-section (10)
An investment fund is a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate which has a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 or the International Financial Services Centres Authority (Fund Management) Regulations, 2022. "Unit" means the beneficial interest of an investor in the fund or a scheme of the fund and includes shares or partnership interests. Those regulations are other laws; the reader should check them.
The flow-through rule, sub-section (1)
Irrespective of anything in any other provision and subject to section 224, a unit holder who receives income, or to whom income accrues or arises, out of investments in the fund is chargeable as if the fund's investments had been made directly by him.
Losses, sub-sections (2) to (4)
Sub-section (2) applies where, in a tax year, the net result of computing the fund's total income, without giving effect to Schedule V (Table: serial number 1), is a loss under any head that cannot be, or is not wholly, set off against income under other heads of that year. Out of that loss:
- (a) the loss under "Profits and gains of business or profession" is (i) allowed to be carried forward and set off by the fund as per Chapter VII, and (ii) ignored for sub-section (1), that is, it does not pass to the unit holder;
- (b) any other loss is also ignored for sub-section (1) if it arose in respect of a unit which has not been held by the unit holder for at least twelve months.
Sub-section (3) concerns a loss, other than business loss, accumulated at the fund's level as on the 31st March, 2019. It is deemed to be the loss of a unit holder who held the unit on that date, in the same manner as sub-section (1), and he may carry it forward for the remaining period, counted from the year the loss first occurred taking that year as the first year, and set it off under Chapter VII. Under sub-section (4), the loss so deemed is not available to the fund on or after the 1st April, 2019. Chapter VII is explained in our post on carrying forward a business loss under section 112.
Nature, rate and unpaid income, sub-sections (5) to (8)
- (5) Income paid or credited by the fund is deemed to be of the same nature and in the same proportion in the unit holder's hands as in the fund's, subject to sub-section (2).
- (6) The fund's total income is charged (a) at the rate or rates specified in the Finance Act of the relevant year, where the fund is a company or a firm, or (b) at the maximum marginal rate, in any other case.
- (7) Income not paid or credited to the unit holder is, subject to sub-section (2), deemed credited to him on the last day of the tax year in the proportion in which he would have been entitled had it been paid.
- (8) Income already included in his total income on accrual is not included again when actually paid.
Statement, sub-section (9)
The person responsible for crediting or paying the income on behalf of the fund, and the fund, must furnish within such time as may be prescribed, to the person liable to tax and the prescribed income-tax authority, a statement in the prescribed form, verified in the prescribed manner, with details of the nature of the income and other prescribed details.
A worked example
Names and amounts are assumed. The Act prints no rate for these sections, so no tax amount is computed.
Quillfeather Growth Fund is a Category II Alternative Investment Fund organised as a trust. In a tax year, its computation (without giving effect to Schedule V, serial number 1) shows a business loss of Rs. 2,00,000 and a capital loss of Rs. 1,00,000, neither of which can be set off in that year. Mr. Isidro Navarro bought his units eight months before the tax year ended.
- The business loss of Rs. 2,00,000 is carried forward by the fund under Chapter VII and is ignored for Mr. Navarro under section 224(2)(a).
- The capital loss of Rs. 1,00,000 arose in respect of a unit he has not held for at least twelve months (eight months), so it is also ignored for him under section 224(2)(b).
- Because the fund is a trust, not a company or a firm, its total income is charged at the maximum marginal rate under section 224(6)(b).
Need help with a fund or trust investment?
Unit holders usually first see these rules as a statement of income and losses. Our team can help you check the nature and proportion of income reported, the treatment of losses under section 224(2) and the position under our tax planning advisory service.
Key takeaways
- A business trust passes income to unit holders in the same nature and proportion; the trust is charged at the maximum marginal rate, subject to sections 196, 197 and 198.
- Schedule V (Table: serial number 3 or 4) distributions are deemed income of the unit holder.
- An investment fund means a Category I or Category II Alternative Investment Fund as defined in section 224(10)(a).
- Business loss stays with the fund; other loss goes to the unit holder only if the unit has been held at least twelve months.
- Statements must be furnished in the manner prescribed.
Read next
- Sections 221 and 222: securitisation trusts and venture capital undertakings
- Sections 225 to 227: tonnage tax scheme and computation of tonnage income
- Section 206: MAT and AMT
- Chapter XIII: determination of tax in special cases
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.