Section 223 Tax on income of unit holder and business trust.

Income-tax Act, 2025

At a Glance

Clause 223 of the Income Tax Bill, 2025 (Old Version) sets out special tax treatment for business trusts and their unit holders, including deeming provisions for distributed income and a charging provision for the trust. It affects business trusts and their unit holders (notably REITs/IITs as indicated in the document) and any person responsible for making payments on behalf of a business trust. Effective date or commencement is Not stated in the document.

Background & Scope

Statutory hook: Clause 223 of the Income Tax Bill, 2025 - titled "Tax on income of unit holder and business trust" and placed under "Special provisions relating to pass-through entities." The clause addresses (i) attribution of nature and proportion of distributed income to unit holders, (ii) charging of tax on business trusts' total income, (iii) treatment of certain distributed income items as unit holder income in the tax year, (iv) a specified exclusion from the deeming rule, and (v) a reporting obligation on the payer. Definitions or extended explanations of terms (for example, "business trust", "unit holder", or Schedule V references) are Not stated in the document.

Statutory Provision Mode

Text & Scope

Clause 223 contains five sub-clauses that together create a special taxation regime for business trusts and their unit holders:

• Sub-section (1): Any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust - "irrespective of anything contained in any other provisions of this Act." This is a deeming/attribution provision.
• Sub-section (2): Subject to the provisions of sections 196 and 197, the total income of a business trust shall be charged to tax at the maximum marginal rate.
• Sub-section (3): If, in any tax year, distributed income (or part thereof) received by a unit holder is of a nature referred to in Schedule V (Table: Sl. No. 3) or (Table: Sl. No. 4), then such distributed income (or part) shall be deemed to be income of such unit holder and shall be charged to tax as income of the tax year.
• Sub-section (4): Sub-section (1) shall not apply in respect of any sum referred to in section 92(2)(k) received by a unit holder from a business trust.
• Sub-section (5): Any person responsible for making payment of the income distributed on behalf of a business trust to a unit holder shall furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner, as prescribed, giving the details of the nature of the income paid during the tax year and such other details, as prescribed.

Interpretation

The text indicates a legislative intent to treat pass-through distributions from business trusts transparently - attributing to unit holders the same character and proportion as enjoyed by the trust, and ensuring certain distributions are taxed in the hands of unit holders in the relevant tax year. The use of "irrespective of anything contained in any other provisions of this Act" signals a non-obstante clause that elevates the deeming rule over potentially conflicting provisions. The charging of the business trust's total income at the maximum marginal rate (subject to sections 196 and 197) suggests a measure to prevent tax leakage or mismatch at trust level, although the exact interplay with withholding or certification provisions in sections 196/197 is prescribed elsewhere in the Act. The text frames reporting obligations to enable administrative transparency.

Exceptions/Provisos

Explicit carve-outs in the clause: (a) sub-section (4) excludes any sum referred to in section 92(2)(k) from the deeming provision in sub-section (1). (b) sub-section (2) is qualified by "subject to the provisions of sections 196 and 197." No other provisos or thresholds are contained in the clause. Where the clause references Schedule V (Tables: Sl. No. 3 and Sl. No. 4), the content of those Tables is Not stated in the document.

Illustrations

• Example 1: If a business trust distributes an amount that, in the trust's hands, is profit from business, sub-section (1) deems that distributed sum to be of the same nature in the hands of the unit holder. (The document does not provide numerical illustrations.)

• Example 2: If a distributed amount corresponds to an item listed at Schedule V Table Sl. No. 3, that distributed amount shall be deemed income of the unit holder and charged in the tax year of receipt. (Specifics of Schedule V items are Not stated in the document.)

Interplay

The clause explicitly interacts with sections 196, 197 and 92(2)(k) of the same Act and with Schedule V of the Bill. The reporting duty references a "prescribed authority" and prescribed form/timelines (both Not stated in the document). The clause does not itself reproduce definitions or cross-refer to SEBI regulations, but a marginal note in the document indicates the clause provides for special taxation regime for Infrastructure Investment Trusts and Real Estate Investment Trusts under their respective SEBI regulations; however, the clause text does not incorporate or define those regulatory regimes. Any further interaction with rules, notifications or administrative guidance is Not stated in the document.

Practical Implications

• Compliance and risk areas: The deeming provision in sub-section (1) requires accurate characterisation by the trust of income streams so that unit holders are informed and taxed accordingly. Mischaracterisation at trust level could lead to incorrect taxation of unit holders; responsibility for accurate reporting appears to rest with the payer under sub-section (5). The charge in sub-section (2) of the trust's total income at the maximum marginal rate may produce higher tax at trust level unless mitigated by sections 196/197 mechanisms (details of which are Not stated in the document).
• Record-keeping/evidence: The reporting obligation in sub-section (5) implies preservation of records that show the nature of distributed income and supporting evidence for the characterisation. The document does not detail retention periods, forms, or evidence standards; these are Not stated in the document.

Key Takeaways

• Clause 223 imposes a deeming rule: distributed income retains the same nature and proportion in the hands of unit holders as in the business trust (sub-section (1)).
• The total income of a business trust is chargeable at the maximum marginal rate, subject to sections 196 and 197 (sub-section (2)).
• Distributed items identified in Schedule V (specified Tables) are expressly taxed as unit holder income in the tax year of receipt (sub-section (3)).
• Sub-section (1) does not apply to sums referred to in section 92(2)(k) (sub-section (4)).
• Payers of distributed income must furnish statements to unit holders and the prescribed authority with prescribed details, form and timing (sub-section (5)); specifics of prescription are Not stated in the document.
• Definitions, Schedule V content, and procedural prescriptions (forms, timelines, prescribed authority) are Not stated in the document.
• The clause is presented as a special regime for pass-through entities; the document notes an application to REITs/IITs, but the text of the clause does not itself define those entities or reference SEBI regulations.

Differences between Clause 223 of the Income Tax Bill, 2025 (Old Version) and Section 223 of the Income-tax Act, 2025

Identified differences based strictly on the two provided texts:

• Sub-section (2): Old Version references "sections 196 and 197"; the later Section 223 adds "and 198" (i.e., references to sections 196, 197 and 198). Practical impact: the legislative final text broadens the reservation/subject-to clause to include section 198 as well, thereby bringing any provisions or limitations in section 198 into the qualification for charging the trust's total income at the maximum marginal rate. Exact effect depends on the content of section 198, which is Not stated in the document.
• Sub-section (5) wording: Old Version uses "as prescribed" for time/form/manner and for other details; Section 223 uses "as may be prescribed." Practical impact: this is a minor drafting variation that emphasises subordinate legislation by using "may be prescribed"; substantive change is not evident from the texts alone. The document does not state any change in the substance of prescribed requirements.
• Contextual note: The Old Version includes an appended explanatory sentence that the clause provides for a special taxation regime for Infrastructure Investment Trusts and Real Estate Investment Trusts under SEBI regulations. That explanatory note is present in Document 2 but is Not part of the clause text. The final Section 223 text (Document 1) omits that explanatory sentence. Practical impact: the removal of that explanatory sentence from the statute text means the statute itself does not explicitly reference SEBI regimes; however, whether the provision applies to REITs/IITs is a matter of statutory interpretation and is Not stated in the document.

Actionable Points (derived from the clause)

• Trusts and payers should establish processes to classify income items at trust level and document the character and proportion of distributions, since those determinations flow through to unit holders under the deeming rule.
• Payers must prepare to furnish statements to unit holders and the prescribed authority in the prescribed form and time - though the exact form/timeline and the identity of the prescribed authority are Not stated in the document.
• Unit holders should expect taxable consequences corresponding to the character of amounts received; specifics of Schedule V items that trigger immediate taxation in the hands of unit holders are Not stated in the document and require consulting the Schedule in the Bill/Act.

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Full Text:

Section 223 Tax on income of unit holder and business trust.

Deeming rule: distributions retain trust character, requiring payer reporting and trust taxation at maximum marginal rate. Clause 223 deems distributions by a business trust to retain the same character and proportion in the hands of unit holders, charges the trust's total income at the maximum marginal rate subject to qualifying statutory mechanisms, treats specified scheduled items as unit holder income in the year of receipt, excludes certain sums from the deeming rule, and requires payers to furnish prescribed statements detailing the nature of distributed amounts.