Section 10(23FBB) of the Income Tax Act deals with taxation of business income earned by unit holders of an investment fund—specifically, Category I or II Alternative Investment Funds (AIFs) registered with SEBI.
What It Covers:
- It applies to that portion of income accruing or arising to, or received by, a unit holder which is of the same nature as “Profits and Gains of Business or Profession” (PGBP).
- This income is taxable in the hands of the unit holder, not exempt.
Why It Exists:
While Section 10(23FBA) exempts non-business income (like capital gains or interest) at the fund level, business income is taxed at the investor level under Section 10(23FBB), ensuring transparency and pass-through treatment.
Example:
Let’s say Zenith Capital Fund, a Category II AIF, earns:
- ₹5 crore in capital gains (exempt at fund level under 10(23FBA)),
- ₹2 crore in business income (e.g., advisory services).
If Investor A holds 10% of the fund:
- ₹50 lakh of capital gains is exempt in their hands (pass-through via Section 115UB),
- ₹20 lakh of business income is taxable in their hands under Section 10(23FBB) as PGBP.
This ensures that business income doesn’t escape taxation just because it flows through an AIF.
