Section 115U of ITA, 1961 : Section 115U: Tax On Income In Certain Cases

Explanation using Example

Imagine an investor, John, who has invested in a Venture Capital Fund (VCF), which in turn invests in various startups. In the financial year, the VCF earns profits from its investments in these startups and decides to distribute these earnings to its investors, including John.

Under Section 115U(1) of the Income-tax Act, 1961, the income distributed to John by the VCF will be taxed in John's hands as if he had made direct investments in the startups. This means John must pay taxes on these earnings at the applicable rate.

According to Section 115U(2), the VCF is required to furnish a statement to John detailing the nature of the income distributed to him, and also to the income tax authorities, within the prescribed time frame.

Section 115U(3) ensures that the income John receives retains the same character for tax purposes as it had in the hands of the VCF.

Thanks to Section 115U(4), certain withholding tax provisions do not apply to the income paid by the VCF to John.

If the VCF does not distribute the income but retains it, Section 115U(5) states that the income will be deemed to have been credited to John on the last day of the financial year, and he is liable to pay tax on his share of the income as if it were distributed.

Finally, Section 115U(6) clarifies that this taxation mechanism does not apply to income from investments made in a VCF for the assessment year starting on or after April 1, 2016, if the VCF is considered an investment fund under Section 115UB.