Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Nature of Business

Taxation of Unit Holders and Business Trusts under Section 223

Updated 11 October 2026 · Fact-checked

Section 223 of the Income-tax Act, 2025 taxes a business trust and its unit holders. Income distributed to a unit holder keeps the same nature and proportion it had in the trust's hands. The trust's own total income is charged at the maximum marginal rate, subject to sections 196, 197 and 198.

Understand Taxation of Unit Holders and Business Trusts

A business trust (such as a REIT or InvIT) pools money from investors, who hold units. The trust earns income from its assets and distributes it to unit holders. The tax question is simple: who pays, and in what form?

Section 223 answers this with a pass-through idea. Under section 223(1), any income distributed by the trust to 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 trust. So if the trust earned interest, the distributed part is treated as interest income for you. If it earned dividend, the distributed part is treated as dividend. The rule applies irrespective of anything in other provisions of the Act.

The trust itself is also taxed. Section 223(2) says that, subject to sections 196, 197 and 198, the total income of the trust is charged to tax at the maximum marginal rate. Those three sections are the special provisions the subsection defers to, so read them for the income they cover. This section only tells you the default rate.

Section 223(3) is a deeming rule. If distributed income, or any part of it, is of the nature listed in Schedule V (Table: Sl. No. 3) or Sl. No. 4, it is deemed to be the unit holder's income and is charged to tax as income of the tax year. Section 223(4) carves out one case: the pass-through rule in sub-section (1) does not apply to any sum referred to in section 92(2)(k) received by a unit holder from a business trust.

Finally, section 223(5) creates a compliance duty. The person responsible for paying the distributed income on behalf of the trust must give a statement to the unit holder and to the prescribed authority. It must show the nature of income paid in the tax year and other prescribed details, in the prescribed time, form and manner. This statement lets the unit holder report each component correctly.

Key rules to remember

Pass-through rule: Nature and proportion of distributed income in unit holder's hands = Nature and proportion in the trust's hands; Section 223(1). Applies irrespective of anything in other provisions of the Act, except as sub-section (4) says.
Tax on trust's income: Total income of business trust is taxed at the maximum marginal rate; Section 223(2). Subject to sections 196, 197 and 198, which you must check first.
Deemed income of unit holder: Distributed income of the nature in Schedule V (Sl. No. 3 or 4) = income of the unit holder, charged in that tax year; Section 223(3). Check the Schedule V entries in your study material for what they cover.
Exception to pass-through: Section 223(1) does not apply to any sum referred to in section 92(2)(k) received from a business trust; Section 223(4).
Reporting duty: Payer of distributed income gives a statement of nature of income to the unit holder and the prescribed authority; Section 223(5). Time, form and manner are as prescribed.

How to solve Taxation of Unit Holders and Business Trusts questions

Use this order for any question on a business trust or its unit holders. Answer in the format the paper expects: provision, facts, conclusion.

1Identify the entity as a business trust and the person as a unit holder. State this in one line.
2List the components of the trust's income, for example interest, dividend, rent or other receipts, as the facts give them.
3Apply section 223(1): decide which part was distributed and treat it in the unit holder's hands with the same nature and in the same proportion.
4Check section 223(3): if any distributed part is of the nature in Schedule V (Sl. No. 3 or 4), say it is deemed income of the unit holder for that tax year.
5Check section 223(4): if the sum is one referred to in section 92(2)(k), say the pass-through rule does not apply to it.
6For the trust's own tax, apply section 223(2): maximum marginal rate on total income, subject to sections 196, 197 and 198. Say so if the facts give no special-rate income.
7Note the section 223(5) compliance point: statement of nature of income to the unit holder and the prescribed authority.
8Write a clear conclusion that answers the exact question asked.

Quickest way: Four-question check

When to use it: Use when time is short and the question asks who is taxed and how on a distribution from a business trust.

Question 1: What did the trust earn? Write the nature of each component.
Question 2: What was distributed? Carry the same nature and proportion to the unit holder (section 223(1)).
Question 3: Does the case fall under Schedule V (Sl. No. 3 or 4) or section 92(2)(k)? Apply 223(3) or 223(4) accordingly.
Question 4: What does the trust itself pay? Maximum marginal rate, subject to sections 196, 197 and 198, and the reporting statement under 223(5).

Common mistakes in Taxation of Unit Holders and Business Trusts

Treating all distributions as one type of income, such as a single 'trust distribution'.
Students think of units like shares, where only dividend arises.
Fix: Split the distribution by nature. Section 223(1) says the nature and proportion are the same as in the trust's hands.
Saying the trust pays no tax because income passes through.
The words 'pass-through' are read too widely.
Fix: Section 223(2) charges the trust's total income at the maximum marginal rate, subject to sections 196, 197 and 198. Pass-through applies to the distributed income in the unit holder's hands.
Ignoring the exception in section 223(4).
Students remember only sub-section (1).
Fix: Always check whether the sum is one referred to in section 92(2)(k). If so, sub-section (1) does not apply.
Quoting a fixed tax rate for the trust's income under section 223(2).
Students memorise rates from older law or other sections.
Fix: Write 'maximum marginal rate, subject to sections 196, 197 and 198'. Do not add a number unless the question gives one.
Forgetting the statement under section 223(5).
Compliance duties feel secondary to tax computation.
Fix: Add one line: the payer must furnish a statement of the nature of income paid to the unit holder and the prescribed authority, in the prescribed form, time and manner.

Worked examples

Example 1

Aarav holds units in a business trust. In the tax year, the trust received income in two natures: 60% interest and 40% rent. The trust distributed ₹1,00,000 to Aarav. State how the distribution is treated in Aarav's hands.

Show the solution

The trust is a business trust and Aarav is a unit holder, so section 223 applies.
Under section 223(1), distributed income keeps the same nature and proportion as in the trust's hands.
Interest part: 60% × ₹1,00,000 = ₹60,000.
Rent part: 40% × ₹1,00,000 = ₹40,000.
Check: ₹60,000 + ₹40,000 = ₹1,00,000.
No fact suggests section 223(4) or Schedule V (Sl. No. 3 or 4), so no exception arises.

Answer: Aarav's ₹1,00,000 is treated as ₹60,000 of interest-nature income and ₹40,000 of rent-nature income, in the same proportion as in the trust's hands.

Example 2

Sunrise Infra Trust, a business trust, earned a total income of ₹5,00,000 in a tax year. Advise on how the trust's income is taxed and what compliance applies when it pays distributions to its unit holders. Assume no income falls under sections 196, 197 or 198.

Show the solution

Provision: section 223(2) charges the total income of a business trust at the maximum marginal rate, subject to sections 196, 197 and 198.
Facts: no income falls under those sections, so the default rule applies to the whole ₹5,00,000.
Conclusion on tax: the entire ₹5,00,000 is charged at the maximum marginal rate.
Compliance: under section 223(5), the person making the payment on behalf of the trust must furnish a statement to each unit holder and to the prescribed authority.
The statement gives the nature of income paid in the tax year and other prescribed details, in the prescribed time, form and manner.
This statement helps each unit holder apply section 223(1) and report the correct nature of income.

Answer: The trust's total income of ₹5,00,000 is taxed at the maximum marginal rate under section 223(2). The payer must furnish the section 223(5) statement of the nature of income to unit holders and the prescribed authority.

Exam tips

Write the sub-section number with each point. The paper rewards provision, then facts, then conclusion.
Quote the key words of section 223(1): 'same nature and in the same proportion'.
Do not give a numerical tax rate for the trust unless the question supplies one. Say 'maximum marginal rate, subject to sections 196, 197 and 198'.
In open-book use, mark section 223 and Schedule V in your Act copy so you can read the exact wording quickly.
End every answer with one line on the section 223(5) statement when the question mentions distributions.

Practice questions from Tax Planning and Nature of Business

Taxation of Unit Holders and Business Trusts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Taxation of Unit Holders and Business Trusts: frequently asked questions

What does section 223 of the Income-tax Act, 2025 deal with?

It deals with tax on the income of a unit holder and of a business trust. It lays down the pass-through rule for distributed income and the rate for the trust's own income. It also sets a reporting duty on the payer.

How is income distributed by a business trust taxed in the unit holder's hands?

Under section 223(1), distributed income is deemed to be of the same nature and in the same proportion as received by or accrued to the trust. So interest stays interest and rent stays rent. Sub-section (4) excludes sums referred to in section 92(2)(k).

At what rate is a business trust taxed?

Section 223(2) says the total income of a business trust is charged at the maximum marginal rate. This is subject to sections 196, 197 and 198. Check those sections for any income they cover.

Does this cover REITs and InvITs?

REITs and InvITs are commonly treated as business trusts, and the pass-through idea applies to them. For the exam, rely on the wording of section 223 and the definition of business trust in your study material.