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CMA Final · Direct Tax Laws and International Taxation · Assessment of Trusts

A securitisation trust earned interest income of ₹ 10,00,000 during a tax year and paid out only ₹ 6,00,000 to its investors by the year end. Investor Meera holds 20% of the entitlement. Under section 221 of the Income-tax Act, 2025, what amount is taxable in Meera's hands for that tax year, and in what nature?

Meera is taxed on ₹ 2,00,000 as interest. Under section 221, trust income not paid is deemed credited to the investor on the last day of the tax year in the proportion of entitlement, and keeps the same nature, so 20% of ₹ 10,00,000 is taxable at once.

  1. A₹ 1,20,000 as interest, being only the amount actually paid
  2. B₹ 2,00,000 as interest, because undistributed income is deemed credited on the last day of the tax yearCorrect
  3. C₹ 2,00,000 as income of the trust, taxed only when received by her
  4. D₹ 10,00,000 as interest, since the trust is a pass-through

Explanation

Section 221(3) deems income not paid or credited to be credited to the investor on the last day of the tax year in the proportion of entitlement. The income takes the same nature as in the trust (section 221(2)). 20% of ₹ 10,00,000 is ₹ 2,00,000, taxable as interest. The ₹ 1,20,000 option counts only 20% of the amount paid, and ₹ 10,00,000 ignores her share.

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