Business trusts have gained popularity in recent years as a unique investment vehicle. They offer investors the opportunity to earn regular income from the trust’s underlying business activities. One of the key benefits of investing in a business trust is the tax treatment of the distributed income received by unit holders.
Section 10(23FD) of the Income Tax Act, 1961, exempts the distributed income received by a unit holder from a business trust from tax, if the income is of the same nature as the income referred to in sub-clause (a) of clause (23FC) or clause (23FCA) of section 10.
Sub-clause (a) of clause (23FC) of section 10 refers to the income of a business trust from the following sources:
- Income from carrying on a business
- Income from investments
- Income from rent
- Income from royalties
- Income from other sources
Clause (23FCA) of section 10 refers to the income of a business trust from dividends.
This means that the distributed income received by a unit holder from a business trust will be exempt from tax if it is derived from any of the following sources:
- Business income
- Investment income
- Rental income
- Royalty income
- Dividend income
- Other sources of income
However, it is important to note that the exemption under Section 10(23FD) is only available for the distributed income. The income of the business trust itself is taxable.
Here are some examples of distributed income received by a unit holder from a business trust that would be exempt from tax under Section 10(23FD):
- Dividends received from the business trust
- Rental income received from the business trust
- Interest income received from the business trust
- Capital gains income received from the business trust
To claim the exemption under Section 10(23FD), a unit holder will need to file their income tax return and attach a copy of the statement of income distributed to them by the business trust.
Conditions for availing tax exemption
To avail the tax exemption under Section 10(23FD), certain conditions need to be fulfilled:
- The business trust must be registered with the Securities and Exchange Board of India (SEBI).
- The trust must distribute at least 90% of its income to the unit holders within a specified period.
- The distributed income should be in the form of dividends, interest, rental income, or any other income specified by the SEBI.
Benefits of Section 10(23FD)
Section 10(23FD) provides several benefits to unit holders investing in business trusts:
Unit holders can enjoy tax-free income from the distributed income received from the business trust.
Stability and regular income:
Business trusts typically generate stable and regular income, making them an attractive investment option for income-seeking investors.
Business trusts invest in a variety of assets, providing investors with diversification benefits.
Business trusts are regulated by SEBI, ensuring transparency and accountability.
Investing in business trusts can be a lucrative option for investors looking for regular income and tax benefits. Section 10(23FD) of the Income Tax Act provides tax exemption on the distributed income received by unit holders from a business trust, making it an attractive investment proposition. However, it is essential to carefully evaluate the trust’s performance, underlying assets, and the associated risks before making any investment decisions.