Mechanism: An investment fund paying section 115UB pass-through income to a unit-holder deducts tax — 10% for residents; rates in force for non-residents.
Litigation profile: Sparse. Disputes are at the section 115UB level, not on the withholding — the candour rule applies.
A. SECTION COMMENTARY
Section 194LBB is the withholding counterpart of the investment-fund pass-through regime in section 115UB (Chapter XII-FB), which governs Category I and Category II Alternative Investment Funds (AIFs) registered with SEBI. Where such an investment fund pays or credits to a unit-holder income of the kind referred to in section 115UB (other than the fund's business income, which is taxed at the fund level), it must deduct tax — at ten per cent where the payee is resident, and at the rates in force where the payee is a non-resident.
Pass-through, with business income trapped at the fund
The section 115UB scheme is a hybrid pass-through: non-business income passes through to the unit-holder retaining its character (and section 194LBB withholds on it), while business income is taxed at the fund at the maximum marginal rate and is exempt in the unit-holder's hands. Section 194LBB therefore withholds only on the pass-through (non-business) income distributed to unit-holders; the rate turns on the unit-holder's residential status.
Why authority is sparse — candour
The investment-fund regime is recent and the litigation that exists is at the section 115UB / fund-characterisation level (decided in the fund's or unit-holder's assessment), not on the withholding provision. In candour, there is no direct section 194LBB merits authority; the cognate section 115UB framework governs.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194LBB. Where any income, other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10, is payable to a unit holder in respect of units of an investment fund specified in clause (a) of the Explanation 1 to section 115UB, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon,—
(i) at the rate of ten per cent, where the payee is a resident;
(ii) at the rates in force, where the payee is a non-resident (not being a company) or a foreign company :
Provided that where the payee is a non-resident (not being a company) or a foreign company, no deduction shall be made in respect of any income that is not chargeable to tax under the provisions of the Act.
Explanation.—For the purposes of this section,—
(a) "unit" shall have the meaning assigned to it in clause (c) of the Explanation 1 to section 115UB;
(b) where any income as aforesaid is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee, and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: section 194LBB tracks the section 115UB AIF pass-through and has no direct authority. Only the statutory scheme and cognate principles are offered.
Statutory backdrop — the section 115UB pass-through
Pass-through under section 115UB (Category I/II AIFs)
Principle: Non-business income of a Category I/II AIF passes through to unit-holders retaining its character and is withheld upon under section 194LBB (10% resident; rates in force for non-residents); business income is taxed at the fund (maximum marginal rate) and exempt in the unit-holder's hands, outside section 194LBB.
Use: Fixes what section 194LBB withholds against and the residence-based rate.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194LBB.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194LBB — Income from Units of an Investment Fund (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Withholding counterpart of section 115UB (Category I/II AIFs); lightly litigated.
Finance Act, 2026: No amendment.
Mechanism: An investment fund paying section 115UB pass-through income to a unit-holder deducts tax — 10% for residents; rates in force for non-residents.
Litigation profile: Sparse. Disputes are at the section 115UB level, not on the withholding — the candour rule applies.
A. SECTION COMMENTARY
Section 194LBB is the withholding counterpart of the investment-fund pass-through regime in section 115UB (Chapter XII-FB), which governs Category I and Category II Alternative Investment Funds (AIFs) registered with SEBI. Where such an investment fund pays or credits to a unit-holder income of the kind referred to in section 115UB (other than the fund's business income, which is taxed at the fund level), it must deduct tax — at ten per cent where the payee is resident, and at the rates in force where the payee is a non-resident.
Pass-through, with business income trapped at the fund
The section 115UB scheme is a hybrid pass-through: non-business income passes through to the unit-holder retaining its character (and section 194LBB withholds on it), while business income is taxed at the fund at the maximum marginal rate and is exempt in the unit-holder's hands. Section 194LBB therefore withholds only on the pass-through (non-business) income distributed to unit-holders; the rate turns on the unit-holder's residential status.
Why authority is sparse — candour
The investment-fund regime is recent and the litigation that exists is at the section 115UB / fund-characterisation level (decided in the fund's or unit-holder's assessment), not on the withholding provision. In candour, there is no direct section 194LBB merits authority; the cognate section 115UB framework governs.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194LBB. Where any income, other than that proportion of income which is of the same nature as income referred to in clause (23FBB) of section 10, is payable to a unit holder in respect of units of an investment fund specified in clause (a) of the Explanation 1 to section 115UB, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon,—
(i) at the rate of ten per cent, where the payee is a resident;
(ii) at the rates in force, where the payee is a non-resident (not being a company) or a foreign company :
Provided that where the payee is a non-resident (not being a company) or a foreign company, no deduction shall be made in respect of any income that is not chargeable to tax under the provisions of the Act.
Explanation.—For the purposes of this section,—
(a) "unit" shall have the meaning assigned to it in clause (c) of the Explanation 1 to section 115UB;
(b) where any income as aforesaid is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee, and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: section 194LBB tracks the section 115UB AIF pass-through and has no direct authority. Only the statutory scheme and cognate principles are offered.
Statutory backdrop — the section 115UB pass-through
Pass-through under section 115UB (Category I/II AIFs)
Principle: Non-business income of a Category I/II AIF passes through to unit-holders retaining its character and is withheld upon under section 194LBB (10% resident; rates in force for non-residents); business income is taxed at the fund (maximum marginal rate) and exempt in the unit-holder's hands, outside section 194LBB.
Use: Fixes what section 194LBB withholds against and the residence-based rate.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194LBB.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.