Section 10(23ED) of the Income Tax Act provides a tax exemption for income received by an Investor Protection Fund (IPF) that is:
- Set up by a depository, and
- Notified by the Central Government in the Official Gazette,
- In accordance with regulations made under the SEBI Act, 1992 and the Depositories Act, 19962.
Nature of Exemption:
- The exemption applies to contributions received from the depository.
- However, if any amount credited to the IPF (and previously exempt) is shared with the depository, that amount becomes taxable in the year of sharing.
Example:
Suppose NSDL (National Securities Depository Ltd.) sets up an Investor Protection Fund as per SEBI regulations. It receives ₹20 crore in contributions from NSDL. This ₹20 crore is exempt from income tax under Section 10(23ED).
But if ₹5 crore is later transferred back to NSDL for operational use, that ₹5 crore becomes taxable in the year of transfer.
This provision ensures that funds meant for investor protection are used exclusively for that purpose and not diverted for other uses.
