Section 194LBA of the Income Tax Act

New investment opportunities are opening up and gaining traction with investors as time goes on. There are more and more new ways to raise money and do company, and these are the tax laws. One such idea that has gained popularity in recent years is business trust. Although it functions in a particular market and is subject to separate taxation under the terms of the Income Tax Act of 1961, it is conceptually similar to mutual funds. Section 194LBA determines the TDS on certain income on units of a business trust. In this article, we will provide a detailed overview of Section 194LBA of the Income Tax Act.

---

Table of Contents

Provisions of Section 194LBA of the Income Tax Act

TDS Rate under Section 194LBA

Section 194LBA in a Glance

Conclusion

Most Asked Questions (FAQs)

---

Provisions of Section 194LBA of the Income Tax Act

(1) Where any distributed income mentioned in section 115UA is of the type mentioned in section 10 (23FC) (a) or section 10 (23FCA), and is due by the business trust to its unit holders who are residents, the business trust is in charge of the TDS deduction. The person in charge of making the payment will take 10% income tax from it when it is credited to the payee's account, when it is paid in cash, by cheque, demand draft, or another method, whichever comes first.

(2) A business trust is in charge of deducting taxes at the source when any distributed income mentioned in section 115UA is of the type mentioned in section 10 (23FC) (a) and is paid by the business trust to its unit holders who are either foreign companies or non-residents who are not companies. When this type of payment is credited to the payee's account or when it is paid in cash or another method, whichever comes first, the person in charge of making the payment must deduct income tax from it at the rate of 5% 59 [for income of the kind mentioned in subclause (a)] and 10% [for income of the kind mentioned in subclause (b)]. 

59[(2A) If the special purpose vehicle mentioned in the aforementioned clause has not exercised the option under section 115BAA, then nothing in sub-sections (1) and (2) will apply to revenue of the type described in sub-paragraph (b) of clause (23FC) of section 10.]

(3) A business trust is in charge of deducting tax at source (TDS) when any distributed income mentioned in section 115UA is of the type mentioned in section 10 (23FCA) and is due to the business trust's unit holders who are either foreign companies or non-residents (not corporations). The person responsible for making the payment will deduct income tax at the current rates when the money is credited to the payee's account, when it is paid in cash, via cheque, demand draft, or another method, or any combination of these.

TDS Rate under Section 194LBA

The following table indicates the TDS rates applicable under Section 194LBA:

Particulars	Rate
Distribution of dividend income (w.e.f. 1stApril 2020) and income referred under section 10(23FC) & 10(23FCA) to resident	10%(7.5% with effect from 14 May 2020 to 31 March 2021)
Distribution of dividend income (w.e.f. 1stApril 2020) and income referred under section 10(23FC)(a) to non-resident	5%
Distribution of income referred under section 10(23FC)(b) to non- resident	10%
Distribution of income referred under section 10(23FCA) to non-resident	Current rates

Section 194LBA in a Glance

The Indian Income Tax Act's Section 194LBA addresses the TDS (Tax Deducted at Source) on specific income received from business trust entities. This is a synopsis: 

• Applicability: Income given to unit holders by a business trust is covered by Section 194LBA. Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) are common types of business trusts.

• Income Type: Dividends mentioned in Section 115UA are the source of income liable to TDS under Section 194LBA.

• TDS Rate: In accordance with Section 194LBA, the business trust's income distribution to unit holders is subject to a 10% TDS rate. 

• Timing of TDS: TDS must be withheld when income is credited to the payee's account or when payment is made, whichever comes first. 

• Exemptions: If the unit bearer is a non-resident or if certain requirements are satisfied, there may be lower TDS rates or particular exemptions available under applicable Double Taxation Avoidance Agreements (DTAA).

Conclusion

The government has carefully constructed the requirements to prevent any instances of double taxation, even if the taxation of business trusts may appear complicated. According to a business trust's tax laws, unit holders are excused from paying taxes on income that is taxed in the business trust's hands. On the other hand, unit holders are nonetheless subject to taxes on all income that is exempt in the hands of the business trust. A detailed understanding of Section 194LBA is required to keep track of TDS on income from business trusts.

FAQ

Q1. What is the rate and time of tax deduction u/s 194LBA? 

If the payee is a resident, the tax rate under section 194LBA is 10%; if not, it is 5%. Either the actual payment (in cash, cheque, draft, or another method) or the credit of income to the payee's (receiver's) account occurs first.

Q2. Where to report income distributed by business trust in ITR?

Details of pass-through income from business trusts or investment funds as mentioned in sections 115UA or 115UB must be included in Schedule Pass Through Income (PTI). 

Q3. Who is responsible for deducting tax under section 194LBA?

Tax must be withheld at the source by an individual who pays income to unit holders under section 115UA, which is payable by a business trust. A resident (but not a business) or a non-resident may own this type of unit.

Q4. What is a business trust?

Section 2(13A) of the Income Tax Act, 1961 defines a business trust as a trust that is registered as either a Real Estate Investment Trust (REIT) under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or an Infrastructure Investment Trust (InvIT) under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

Q5. Is income received from the units of a business trust taxable?

The type and amount of any revenue that unit holders receive from the business trust should be identical to what was received by the business trust. All revenue received by the unit holders from the business trust is exempt, with the exception of interest and rental income. Dividends paid to unit holders by the business trust are subject to taxation by unit holders. 

Q6. What is the period of holding for units of business trust?

All listed assets will now have a one-year holding period. Consequently, the holding time for business trusts that are listed (REITs, InVITs) is shortened from 36 months to 12 months. Additionally, the 36-month holding term for gold and unlisted securities (apart from unlisted shares) has been shortened to 24 months.

Q7. How does Section 194LBA impact ITR filing for individual investors?

Investors earning income from business trusts must report it under ‘Income from Other Sources’ in their ITR.

Q8. Can NRIs claim refunds on TDS deducted under Section 194LBA?

NRIs can claim refunds if their total tax liability is lower than the TDS deducted by the trust.

Q9. Does Section 194LBA affect HRA deductions for salaried individuals?

No, HRA claims remain unaffected, but income received under 194LBA must be disclosed separately.

Q10. What is the TDS rate under Section 194LBA for resident investors?

TDS is deducted at 10% on interest or rental income distributed by REITs and InvITs to residents.

Q11. Are tax-saving investments allowed to offset income under 194LBA?

No, deductions under Section 80C do not apply to income earned through business trusts.

Q12. How does Section 194LBA affect corporate investors in REITs?

Companies receiving such income must account for it in their business profits and may be subject to additional tax liabilities.

Q13. Can HUFs invest in REITs and claim lower TDS under 194LBA?

Yes, HUFs can invest in REITs, but the standard TDS rate applies without any special exemption.

Q14. Does TDS apply if income is reinvested in REITs?

Yes, TDS is deducted at source regardless of whether the income is reinvested or withdrawn.

Q15. Are small investors affected by TDS under 194LBA? 

Yes, even small investors are subject to TDS deductions, though they may claim refunds if eligible.

Q16. How should income under Section 194LBA be reported in tax returns?

 It should be declared in the appropriate income head, and credit for TDS deducted must be claimed in ITR filings.