Section 194LBB of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on income distributed by Category I & II Alternative Investment Funds (AIFs) to their investors. Below is a structured breakdown of its provisions:
1. Applicability of Section 194LBB
✅ Covered Payments:
- Income from Category I & II AIFs(e.g., Venture Capital Funds, Private Equity Funds).
- Includes:
- Interest
- Dividends
- Other income(excluding capital gains) distributed to investors.
❌ Exemptions:
- Category III AIFs(covered under Section 194LBC).
- Capital gains(taxed separately under capital gains provisions).
- Income already taxed at fund level(e.g., dividends from Indian companies).
2. TDS Rates & Thresholds
| INVESTOR TYPE | TDS RATE (PAN PROVIDED) | TDS RATE (PAN NOT PROVIDED) |
| Resident Individuals/HUFs | 10% | 20% |
| Resident Companies | 10% | 20% |
| Non-Residents | 10% or DTAA rate (if lower) | 20% |
| Threshold | No minimum limit (TDS applies on all amounts) |
Example:
- Income Distributed: ₹5 lakh to a resident individual (PAN provided).
- TDS (10%): ₹50,000 → Net Payment: ₹4.5 lakh.
3. Who Deducts TDS?
- Fund Managerof the AIF (Category I/II).
- Due Date for Deduction: At the earlier of:
- Credit to investor’s account.
- Actual payment.
4. Compliance Requirements
- TDS Deposit: By the 7th of the next month(March: April 30) via Challan 281.
- TDS Return:
- Form 26Q(for resident investors).
- Form 27Q(for non-resident investors).
- TDS Certificate: Issue Form 16Ato investors.
5. Key Exceptions
- No TDSif income is exempt (e.g., dividends from Indian companies).
- Lower TDS under DTAA: Non-residents can submit Tax Residency Certificate (TRC)for treaty benefits.
6. Penalties for Non-Compliance
- Late Deduction: Interest @ 1% per month.
- Late Payment: Interest @ 5% per month.
- Non-Filing: Penalty up to ₹1 lakh.
7. Key Takeaways
🔹 10% TDS on income from Category I/II AIFs (excluding capital gains).
🔹 PAN Mandatory to avoid 20% deduction.
🔹 No threshold – TDS applies even on small amounts.
🔹 Quarterly Filing: Use Form 26Q/27Q.
