Section 115UB of ITA, 1961 : Section 115Ub: Tax On Income Of Investment Fund And Its Unit Holders

Explanation using Example

Imagine Sarah invests in an Alternative Investment Fund (AIF) which is a type of investment fund regulated by the Securities and Exchange Board of India (SEBI). The AIF invests in various assets and generates income from these investments. According to Section 115UB of the Income-tax Act, 1961, any income that the AIF earns and passes on to Sarah will be taxed as if Sarah had earned that income directly from the investments.

For instance, if the AIF makes a profit from selling stocks and allocates a portion of that profit to Sarah, she will have to pay tax on her share of the profit as if she had sold the stocks herself. If the AIF incurs a loss and cannot set it off against other income, the loss can be carried forward by the AIF to be set off in future years, but this loss won't affect Sarah's tax liability for the current year.

The income Sarah receives retains its nature (such as capital gains or interest) and is taxed accordingly in her hands. The AIF itself is taxed at a specified rate if it's a company or firm, or at the maximum marginal rate if it's another type of entity.

If the AIF doesn't distribute the income to Sarah by the end of the year, it is deemed that Sarah has been credited with her share on the last day of the financial year. Additionally, the AIF must provide Sarah and the tax authorities with a statement detailing the nature and amount of income allocated to her.