Section 223: tax on income of unit holder and business trust

Introduction

A business trust distribution retains its nature and proportion in the unit holder’s hands. The section also addresses the trust’s own tax position and the information statement issued to the holder.

Key takeaways

Current dividend exemption after the August 2026 amendment

The Taxation and Other Laws (Amendment) Act, 2026 omitted condition (b) in Schedule V, Table entry 5 with deemed effect from 1 April 2026. That was the exclusion from the unit-holder exemption for dividends received or receivable by the business trust from an SPV that had exercised the Section 200 option.

Accordingly, do not use the former condition (b) to deny that scheduled exemption solely because the SPV exercised Section 200. Apply Section 11 and the current Schedule V together with Section 223’s character and proportion rules. The remaining exclusions for SPV interest and specified direct real-estate income still operate, so this does not make all trust distributions exempt.

Section 223 itself was not amended. Its quoted text is retained, while the unit-holder computation must also account for the amended Schedule. The Act separately changed the Finance Act surcharge for qualifying domestic-company SPVs under Sections 200 and 201 to 25%; that company-level surcharge is not the unit holder’s tax rate.

Income retains its character when distributed

Any income distributed by a business trust to its unit holders is deemed to be of the same nature and in the same proportion in the unit holder's hands as it was when received by, or accrued to, the business trust.

Section 223(3) contains the tax rule for the specified distributed components. Apply it together with Section 11 and the amended Schedule V entry 5, including the omission of its former dividend exclusion; the current dividend qualification is explained above.

This pass-through characterisation does not apply to any sum referred to in Section 92(2)(k) received by a unit holder from a business trust.

Taxation of the business trust itself

Subject to Sections 196, 197 and 198, the total income of a business trust is charged to tax at the maximum marginal rate.

Reporting obligation

Any person responsible for making payment of income distributed on behalf of a business trust to a unit holder must furnish a statement to the unit holder and the prescribed authority, within the prescribed time, form and manner, giving details of the nature of the income paid during the tax year.

Official August 2026 amendment

• Taxation and Other Laws (Amendment) Act, 2026 — enacted Act 21 of 2026
• Income-tax Act, 2025 — Finance Act, 2026 consolidation (read with the August amendment)

Step-by-step flow for applying Section 223

1. 1

   Has a business trust distributed income to a unit holder?

   • No: The unit-holder rules in Section 223(1) and (3) are not triggered.
   • Yes: Go to the next step.
2. 2

   Is the sum one referred to in Section 92(2)(k)?

   • Yes: Section 223(1) does not apply to that sum (Section 223(4)). Examine Section 92.
   • No: Go to the next step.
3. 3

   Keep the same nature and proportion

   Under Section 223(1), the distributed income has the same nature and proportion in the unit holder's hands as it had when received by or accrued to the business trust.

4. 4

   Is any part of the distribution of the nature in Schedule V (Table: Sl. No. 3) or (Table: Sl. No. 4)?

   • Yes: That part is deemed income of the unit holder and charged as income of the tax year (Section 223(3)).
   • No: Apply the other provisions of the Act to each component by its nature.
5. 5

   Tax the trust's own total income and issue the statement

   Subject to Sections 196, 197 and 198, the business trust's total income is charged at the maximum marginal rate (Section 223(2)). The payer gives the unit holder and the prescribed authority a statement of the nature of income, in the prescribed form, time and manner (Section 223(5)).

Practical checklist

Frequently asked questions