Tax deducted at source, or TDS, is an important part of the taxation framework for Alternative Investment Funds (AIFs). For investors, it can affect the amount actually received from an AIF, the timing of tax payments and the way income is reported in the income-tax return.
The rules have also changed with the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025. TDS on AIF distributions was earlier governed primarily by Section 194LBB. From 1 April 2026, the corresponding TDS provision is Section 393 of the Income-tax Act, 2025, while Section 224 carries forward the investment-fund pass-through framework.
For investors, the important questions are not limited to the TDS rate. It is equally important to understand which AIFs are covered, when TDS is deducted, whether the deduction is final, how non-resident investors are treated and how the credit can be claimed.
Note: This article explains the Indian tax framework for general understanding. AIF taxation can depend on the fund structure, nature of income, investor status, tax treaty and applicable tax year. Investors should obtain professional tax advice for their specific circumstances.
What Is TDS on an AIF Distribution?
TDS on AIF distributions refers to tax withheld by an investment fund when taxable income is credited or paid to an eligible unit holder.
Under the earlier Section 194LBB, an investment fund was required to deduct tax when income was credited to the account of the unit holder or paid, whichever occurred earlier. For a resident investor, the prescribed rate was 10%. For a non-resident individual or foreign company, tax was deducted at the rates in force, subject to the rule that income not chargeable to tax in India was not subject to deduction.
Under the current framework, Section 393(1), Table 4(iii), covers income relating to units of an investment fund specified under Section 224. The resident rate is 10%, with a nil threshold, meaning there is no minimum monetary threshold before this particular TDS provision becomes applicable.
Therefore, TDS on AIF Distributions should not be confused with the investor's final income-tax liability. It is generally a mechanism for collecting tax during the year.
Why Is Tax Deducted from AIF Income?
The pass-through framework generally taxes eligible investment-fund income in the hands of the unit holder rather than taxing the same income only at the fund level.
Section 224 of the Income-tax Act, 2025 provides that income received or accruing to a unit holder from investments made through an investment fund is taxable broadly as if the unit holder had made the investment directly. It also provides that income paid or credited retains the same nature and proportion in the investor's hands.
This is why TDS on AIF distributions is relevant even though the underlying investment may have generated different types of income.
For example, an eligible AIF may generate:
- Capital gains
- Interest income
- Dividend income
- Other income covered by the pass-through framework
The fund reports the relevant income details, and the investor generally accounts for the income under the applicable tax provisions in TDS on AIF Distributions.
Which AIF Categories Are Covered by the Pass-Through Framework?
The definition of an "investment fund" under Section 224 specifically covers funds registered as Category I or Category II AIFs under the applicable SEBI regulations or eligible IFSCA regulations.
This means:
Category I AIF TDS
Category I AIFs can fall within the Section 224 pass-through framework when they meet the statutory definition of an investment fund.
Category II AIF TDS
Category II AIFs are also covered by the definition, subject to the applicable statutory conditions.
Category III AIF TDS
Category III AIFs are not included in the definition of "investment fund" under Section 224. Consequently, the specific pass-through provisions under Section 224 and the corresponding Section 393 investment fund TDS provision do not apply to Category III AIFs in the same manner.
Tax treatment for Category III AIFs needs to be examined separately based on the fund structure and nature of income.
How Did Section 194LBB Apply Under the Income-tax Act, 1961?
Section 194LBB was the principal provision for TDS on AIF Distributions under the Income-tax Act, 1961.
It applied to income payable to a unit holder in respect of units of an investment fund, other than the portion of income exempt under Section 10(23FBB). The provision required deduction at:
- 10% for a resident payee
- Rates in force for a non-resident individual or foreign company
The deduction was required at the time of credit to the payee's account or payment, whichever was earlier.
The old provision did not prescribe a general monetary threshold for investment-fund income. This is an important point when comparing the old regime with other TDS provisions that have specific minimum limits.
How Does Section 393 Apply Under the Income-tax Act, 2025?
The Income-tax Act, 2025 came into force from 1 April 2026, replacing the Income-tax Act, 1961 for the current tax framework. Section 393 consolidates several TDS on AIF Distributions into a broader provision.
For residents, Section 393(1) Table 4(iii) specifically covers:
Income relating to units of an investment fund specified in Section 224, other than the proportion exempt under Schedule V Table 2.
The prescribed rate is 10% and the threshold is nil.
For non-residents, Section 393(2) Table 8 covers income from units of an investment fund specified in Section 224. The applicable rate is rates in force rather than a separate flat rate stated in that table.
Thus, the transition can be broadly understood as:
| Earlier framework | Current framework |
| Section 194LBB | Section 393 |
| Section 115UB | Section 224 |
| Form 64C framework | Form 78 framework |
| Section 197 for eligible lower TDS applications | Section 395(1) |
| Resident rate: 10% | Resident rate: 10% |
| Non-resident: rates in force | Non-resident: rates in force |
The Income Tax Department's mapping documents also identify Section 194LBB as corresponding to Section 393(1) Table 4(iii), Section 393(2) Table 8 and related provisions.
What Is the Role of Section 224 for Investment-Fund Income?
Section 224 is important because it establishes the tax treatment of income of an investment fund and its unit holders under the new Act.
The section provides that eligible unit-holder income is taxed in the same manner as it would have been if the investment had been made directly by the unit holder. It also preserves the nature and proportion of the income in the investor's hands.
Another important provision is Section 224(7). If income has accrued to or been received by the investment fund but has not been paid or credited to the investor, it can be deemed to have been credited to the unit holder on the last day of the tax year, subject to the provisions of the section.
This makes the timing of taxation more important than simply looking at the date on which cash reaches an investor's bank account.
Section 393 for Resident vs Non-Resident AIF Investors
The treatment differs depending on the residential status of the investor.
Resident investors
For a resident unit holder, TDS on AIF distributions relating to covered investment-fund income is generally deducted at 10% under Section 393(1) Table 4(iii).
NRI and other non-resident investors
For a non-resident individual or foreign company, Section 393(2) Table 8 applies to covered investment-fund income. The provision specifies rates in force.
The final withholding rate can therefore depend on the nature of the income, applicable domestic provisions, surcharge and cess, and an applicable tax treaty.
This is why AIF TDS for NRI investors should not automatically be assumed to be 10%.
When Is TDS Deducted: At Credit or Payment?
The general rule is deduction at the earlier of:
- Credit of income to the account of the payee; or
- Payment in cash, cheque, draft or another mode.
Section 393(1) expressly provides this timing rule for resident payments, while Section 393(2) applies a similar credit-or-payment mechanism for non-residents.
Therefore, TDS on AIF distributions is not necessarily linked only to the date when an investor receives cash.
The pass-through provisions also need to be considered where income is deemed to have been credited under Section 224.
Is There Any Minimum Threshold for AIF TDS?
No threshold applies to the specific investment-fund entry under Section 393(1) Table 4(iii).
The table specifies:
- Rate: 10%
- Threshold: Nil
Therefore, a resident investor should not assume that TDS becomes applicable only after receiving a particular minimum amount of AIF income.
The absence of a threshold is one of the key points to remember when calculating AIF TDS.
What Is the TDS Rate for Resident AIF Investors?
The TDS rate on AIF income for a resident unit holder under Section 393(1) Table 4(iii) is 10%.
The deduction applies to covered income relating to units of an investment fund, excluding the proportion that is exempt under the relevant Schedule V provision.
Importantly, the 10% withholding rate does not mean that every investor ultimately pays tax at 10%. The actual tax liability can be higher or lower depending on the nature of income and the investor's applicable tax position.
This distinction between AIF TDS rate and final tax liability is essential.
How Does TDS Work for NRIs and Non-Resident Companies?
For AIF TDS for NRI investors, Section 393(2) Table 8 provides for deduction at rates in force.
The relevant domestic rate can therefore differ from the 10% rate applicable to residents.
For a non-resident investor, the fund may need to consider:
- Nature of income
- Whether the income is taxable in India
- Applicable domestic tax rate
- Surcharge and cess, where applicable
- DTAA eligibility
- Tax residency documentation
- PAN and other prescribed information
The Income Tax Department's current TDS on AIF Distributions material also distinguishes between resident and non-resident investment-fund income.
Does TDS Apply to Capital Gains, Interest and Dividend Income?
The pass-through framework preserves the nature of eligible income in the investor's hands.
Therefore, TDS on AIF capital gains, TDS on AIF interest income and TDS on AIF dividend income need to be examined within the Section 224 and Section 393 framework.
The important distinction is this:
TDS is a withholding mechanism; it does not change the character of the underlying income.
For example, if an eligible investment fund passes through capital gains, those gains retain their relevant character for tax computation by the investor, subject to the applicable tax provisions.
Similarly, interest and dividend income may have their own tax treatment.
The 10% resident withholding rate should therefore not be interpreted as the final tax rate applicable to every category of AIF income.
Which AIF Income Is Excluded from TDS?
Section 393(1) Table 4(iii) specifically excludes the proportion of income that is exempt under Schedule V Table 2.
For non-residents, Section 393 also operates subject to the provisions relating to income that is not chargeable to tax in India.
This means the fund must examine the nature of the income before determining the amount on which withholding applies.
Investors should also distinguish between:
- Exempt income
- Taxable pass-through income
- Return of capital
- Income that may not be chargeable to tax in India
A return of an investor's original capital contribution is not, merely because money is being paid back, the same thing as taxable income.
Is TDS Deducted When Income Is Credited but Not Distributed?
Potentially, yes.
The basic TDS rule operates on credit or payment, whichever is earlier. More importantly, Section 224(7) provides a special deemed-credit rule for income accruing to or received by the investment fund but not paid or credited to the investor by the end of the tax year.
This means investors should not assess their tax position only by looking at actual cash distributions.
The exact accounting and withholding treatment should be checked against the fund's distribution statement and tax documentation.
Is AIF TDS the Final Tax Liability?
No.
TDS on AIF distributions is generally an advance collection of tax and not automatically the investor's final liability.
Suppose a resident investor has ₹10 lakh of taxable covered income and the fund deducts ₹1 lakh as TDS at 10%. The investor may have to calculate tax on the underlying income according to its actual nature and applicable tax rate.
The ₹1 lakh TDS can then generally be considered as tax already paid, subject to its appearing correctly in the tax records and being eligible for credit.
If the final TDS on AIF Distributions liability is higher, additional tax may be payable. If the final liability is lower, the excess may potentially be claimed as a refund.
How Can Investors Claim TDS Credit or a Refund?
An investor should first verify the amount deducted and reported against the PAN.
The AIF TDS credit is generally claimed while filing the income-tax return. The investor should reconcile:
- Fund's income statement
- TDS certificate
- Form 26AS
- AIS
- Income reported in the ITR
If excess TDS has been deducted compared with the investor's final tax liability, the investor can generally claim the eligible excess as a refund through the income-tax return.
The AIF TDS refund is therefore not normally claimed simply because TDS was deducted. It arises when the total taxes paid, including eligible TDS, exceed the final tax liability.
Where Does AIF TDS Appear in Form 26AS and AIS?
AIF income Form 26AS records can be checked to verify TDS reported against the investor's PAN.
AIS provides a broader view of tax-related and financial information. The Income Tax Department states that AIS includes TDS and TCS information along with other specified financial information.
From the investor's perspective, it is useful to check both records before filing the return.
If the fund's TDS certificate shows ₹1 lakh but only ₹80,000 appears in the tax records, the mismatch should be investigated with the fund or deductor before finalising the ITR.
When Can Advance Tax Become Payable?
TDS does not automatically eliminate an investor's advance-tax obligation.
For example, if an investor receives significant AIF income and the 10% TDS deducted is substantially lower than the final tax payable, additional tax may remain payable during the year.
This is particularly relevant for investors with:
- Large capital gains
- Significant interest income
- Multiple AIF investments
- Other taxable investments
- Income subject to different tax rates
Investors should therefore calculate their overall tax liability rather than treating AIF advance tax and TDS as interchangeable concepts.
Can Investors Apply for Lower or Nil Withholding?
Yes, the new framework has a specific mechanism for lower or nil deduction.
Under the Income-tax Act, 1961, Section 197 provided a lower or nil deduction certificate for specified provisions, including Section 194LBB. Under the Income-tax Act, 2025, Section 395(1) provides the corresponding lower or nil deduction mechanism. The Income Tax Department's 2026 guidance identifies Form 128 for applications under Section 395(1).
Therefore, while an older article may refer to a lower withholding certificate AIF application under Section 197, the current statutory reference from 1 April 2026 is Section 395(1).
This is an important change in terminology and section numbering in TDS on AIF Distributions.
How Do DTAA Provisions Affect NRI AIF Investors?
An NRI investor may be eligible for DTAA relief on AIF TDS if the relevant treaty provisions apply and the investor satisfies the necessary conditions.
For treaty claims, documentation can be important, including:
- Tax Residency Certificate
- PAN, where applicable
- Prescribed declarations
- Beneficial ownership details, where relevant
- Other documents required to establish treaty eligibility
The domestic withholding provision and the treaty should therefore be examined together.
A lower treaty rate does not automatically mean the fund can ignore domestic withholding requirements without supporting documentation.
Section 194LBB vs Section 393: Key Differences
The simplest way to understand Section 194LBB vs Section 393 is to view Section 393 as the new consolidated TDS framework under the Income-tax Act, 2025.
| Point | Section 194LBB | Section 393 |
| Governing law | Income-tax Act, 1961 | Income-tax Act, 2025 |
| Current status | Applied under the old Act | Current provision from 1 April 2026 |
| Investment-fund provision | Section 194LBB | Section 393(1) Table 4(iii) for residents |
| Pass-through provision | Section 115UB | Section 224 |
| Resident rate | 10% | 10% |
| Resident threshold | No specific threshold | Nil |
| Non-resident provision | Rates in force | Section 393(2) Table 8 - rates in force |
| Lower/nil withholding | Section 197 | Section 395(1) |
The Income Tax Department's section-mapping material confirms the correspondence between Section 194LBB and the relevant provisions of Section 393.
TDS on AIF Distributions: Checklist for Investors
Before filing a tax return, an investor should review the following:
- Confirm whether the AIF is a Category I or Category II AIF covered by Section 224.
- Identify the nature of the income received or credited.
- Check the AIF TDS rate applied by the fund.
- Verify whether TDS was deducted at 10% for a resident investor.
- For an NRI, verify the domestic rate and applicable DTAA position.
- Reconcile the fund's tax statement with Form 26AS.
- Check AIF income in AIS.
- Obtain the relevant AIF TDS certificate.
- Check whether Form 16A has been issued for applicable TDS.
- Review the investment fund's prescribed income statement.
- Calculate whether additional tax or AIF advance tax may be payable.
- Check whether a lower or nil withholding certificate under Section 395(1) is relevant.
- Claim eligible AIF TDS credit while filing the ITR.
- Claim a refund where the total eligible tax credits exceed the final liability.
For the new regime, the Income Tax Department's guidance confirms that Form 16A is the certificate used for TDS other than specified salary and other excluded payments.
The reporting framework for investment funds has also moved from the older Form 64C system to Form 78 under the Income-tax Rules, 2026. Form 78 is the statement furnished to unit holders for income distributed under Section 224.
Key Takeaway
The transition from Section 194LBB to Section 393 changes the statutory numbering but retains the core concept of withholding tax on eligible investment-fund income. Section 224 continues the pass-through framework for qualifying Category I and Category II AIFs, while Section 393 provides the current TDS mechanism.
For resident investors, the current provision generally means 10% TDS with no threshold on covered investment-fund income. For NRIs and foreign companies, the relevant provision points to rates in force, making domestic law, income character and DTAA eligibility important.
The practical lesson is simple: TDS on AIF Distributions is not the same as final tax. Investors should reconcile the fund's income statement, TDS certificate, Form 26AS and AIS, and then calculate their actual tax liability before filing the return.
Disclaimer
Disclaimer: This article is for general information and educational purposes only. TDS on AIF Distributions can vary based on the investor's residential status, AIF category, income type, investment structure and applicable tax laws, including DTAA provisions. The information provided here should not be considered tax, legal, accounting or investment advice. Investors should verify the applicable provisions and consult a qualified tax professional before taking any tax-related decision. Tax laws and rules may change from time to time, and the latest provisions should be checked before relying on the information.