Section 222: tax on income in case of venture capital undertakings

Introduction

For a qualifying venture capital company or fund, the section generally taxes an investor as though the underlying investments were made directly. The payer and fund also have information-statement duties.

Key takeaways

How the pass-through works

Income received by, or accruing or arising to, a person out of investments made in a venture capital company or venture capital fund is chargeable to tax in the same manner as if that person had invested directly in the venture capital undertaking.

Income paid or credited by the venture capital company or fund is deemed to be of the same nature and in the same proportion in the investor's hands as it was when received by, or accrued to, the company or fund during the tax year.

Income not actually paid or credited during the tax year is deemed credited to the investor's account on the last day of that tax year, in the proportion the investor would have been entitled to receive it.

Income already taxed in the investor's hands on an accrual basis in one tax year is not taxed again in the year it is actually paid.

Reporting obligation and other rules

The person responsible for crediting or paying the income on behalf of the venture capital company or fund, and the company or fund itself, must furnish a prescribed statement, within the prescribed time, to the taxable person and to the prescribed income-tax authority, giving details of the income paid or credited during the tax year.

Section 222(4) disapplies Chapter XIX-B to income paid by the venture capital company or fund under this Chapter. That treatment does not remove the investor’s income-tax or the prescribed statement obligations.

This section does not apply to income from investments in a venture capital company or venture capital fund that is itself an "investment fund" specified under Section 224(10)(a) - such income is instead governed by Section 224.

When this provision applies

Start with the legal classification of the vehicle and undertaking under Schedule V, Note 4. A commercial description such as venture fund does not by itself establish that Section 222 applies.

For qualifying income, identify both its nature and the investor’s proportionate entitlement. The pass-through preserves these characteristics rather than converting every distribution into one category of income.

Limits and procedural safeguards

Section 222(7) excludes a vehicle that is an investment fund within Section 224(10)(a); establish which framework applies before computing investor income.

An undistributed amount can still be deemed credited on the last day of the tax year. Cash receipt is therefore not the only recognition event. Section 222(6) prevents a second inclusion when previously included accrued income is subsequently paid.

Step-by-step review

1. Verify the vehicle’s statutory classification and whether Section 224 excludes this route.

2. Obtain the prescribed statement and reconcile each underlying income category with the investor’s entitlement.

3. Identify amounts paid, credited or deemed credited at year-end; retain a year-wise tax recognition ledger.

4. When cash is paid later, trace it to income previously included before applying the protection against repeat inclusion.

Hypothetical example

Hypothetical: qualifying income of ₹1,00,000 attributable to an investor is not paid or credited during the year. Subject to Section 222’s conditions, the year-end deemed-credit rule applies. If that same accrued income was included in the investor’s total income, its later cash payment is not included again under subsection (6). This does not establish a tax rate or an exemption for unrelated receipts.

Records to prepare

Keep the vehicle’s registration and classification documents, the income statement and allocation working.

Maintain a reconciliation of prior-year inclusions, year-end deemed credits and subsequent cash distributions.

Official amended Act source

• Income-tax Act, 2025 as amended by Finance Act, 2026: Section 222 and related provisions

Step-by-step flow for applying Section 222

1. 1

   Does the person receive or accrue income from investments in a venture capital company or venture capital fund?

   The terms take their meanings from Schedule V (Note 4) (Section 222(8)).

   • No: Section 222 does not apply.
   • Yes: Go to the next step.
2. 2

   Is the company or fund an investment fund specified in Section 224(10)(a)?

   • Yes: Section 222 does not apply (Section 222(7)). Examine Section 224.
   • No: Go to the next step.
3. 3

   Tax the income as if the person had invested directly in the venture capital undertaking

   Section 222(1). Under Section 222(3), income paid or credited keeps the same nature and proportion as in the hands of the company or fund.

4. 4

   Was all the income from investments in the venture capital undertaking paid or credited during the tax year?

   Chapter XIX-B does not apply to income paid by the company or fund under this Chapter (Section 222(4)).

   • No: Under Section 222(5), the unpaid part is deemed credited on the last day of the tax year, in the proportion of the person's entitlement.
   • Yes: Go to the next step.
5. 5

   Avoid double inclusion and reconcile the statement

   Under Section 222(6), income already included on accrual is not included again when paid. The statement under Section 222(2) is in the prescribed form, time and manner.

Practical checklist

Glossary

Pass-through treatment

Tax treatment that follows the underlying income into the investor’s hands under the statutory conditions.

Deemed credit

A credit recognised by the Act at the specified time even when an actual credit or payment has not occurred.

Frequently asked questions