Tax on Securitisation Trusts and Venture Capital Funds: Sections 221 and 222 of the Income Tax Act 2025
Sections 221 and 222 of the Income Tax Act 2025 make two kinds of vehicles "pass-through". Section 221 covers securitisation trusts and section 222 covers venture capital companies and venture capital funds. In both, the investor is taxed on the income as if he had made the underlying investment directly, and the income keeps its nature and proportion. Income not paid out by the end of the tax year is treated as credited to the investor on 31 March.
This guide explains who is an investor, how the deemed credit works, what the vehicle must report and by when, and where the two sections differ. It is based on the Act as amended by the Finance Act, 2026 (tax year 2026-27 onwards) and the Income-tax Rules, 2026. It is general information, not tax advice.
What is a pass-through under sections 221 and 222?
A pass-through vehicle collects income from its investments and hands it on to its investors. The law ignores the vehicle as a taxpayer for that income and looks through to the investor. Whatever the vehicle earned (interest, dividend, gains) arrives in the investor's hands with the same character and in the same proportion.
Who is taxed on securitisation trust income under section 221?
Section 221(1) applies to an investor of a securitisation trust. An investor is a holder of a securitised debt instrument, securities or a security receipt issued by the trust (section 221(6)(a)). Income the investor receives or that accrues to him out of the investment in the trust is chargeable in the same manner as if the trust's investments had been made directly by him.
A "securitisation trust" is one of three kinds of trust, and it must also fulfil the conditions the Rules prescribe (section 221(6)(d)):
- a "special purpose distinct entity" regulated under the SEBI regulations on public offer and listing of securitised debt instruments;
- a "Special Purpose Vehicle" regulated under the RBI guidelines on securitisation of standard assets; or
- a trust set up by a securitisation company or reconstruction company for the purposes of the SARFAESI Act, 2002 (or under RBI guidelines or directions for those purposes).
A "security receipt" has the meaning in section 2(1)(zg) of the SARFAESI Act, 2002 (section 221(6)(e)).
Who is taxed on venture capital fund income under section 222?
Section 222(1) applies to a person who, out of investments in a venture capital company or a venture capital fund, receives income or has income accrue to him. That income is chargeable as if he had invested directly in the venture capital undertaking (the business the fund invested in).
The three terms take their meaning from Schedule V (Note 4), as section 222(8) says. In outline:
- A venture capital company is a company registered as a Venture Capital Fund before 21 May 2012 under the SEBI Venture Capital Funds Regulations, 1996, or registered as a Venture Capital Fund sub-category of Category I AIF under the SEBI AIF Regulations, 2012. The second kind must be unlisted, must have invested at least two-thirds of its investible funds in unlisted equity shares or equity linked instruments of venture capital undertakings, and must not have invested in an undertaking where its director or a substantial shareholder (more than 10% of its equity) holds more than 15% of the undertaking's paid-up equity share capital.
- A venture capital fund is a fund operating under a trust deed registered under the Registration Act, 1908, with a pre-21 May 2012 VCF registration or the Category I AIF VCF sub-category registration (the latter with the same two-thirds test, a 15% limit on holdings of its trustee or settler in the undertaking, unlisted units and any other prescribed condition). A venture capital scheme made by the Unit Trust of India also qualifies.
- A venture capital undertaking is one defined in the SEBI VCF Regulations, 1996 (regulation 2(n)) or the SEBI AIF Regulations, 2012 (regulation 2(1)(aa)).
How do sections 221 and 222 compare?
| Point | Securitisation trust (section 221) | Venture capital company or fund (section 222) |
|---|---|---|
| Who is taxed | Investor holding a securitised debt instrument, securities or security receipt | Person investing in the venture capital company or fund |
| Taxed as if | Trust's investments were made directly by him (221(1)) | He invested directly in the venture capital undertaking (222(1)) |
| Nature and proportion | Same as in the trust's hands (221(2)) | Same as in the company's or fund's hands (222(3)) |
| Unpaid income | Deemed credited on the last day of the tax year (221(3)) | Deemed credited on the last day of the tax year (222(5)) |
| Taxed again on actual payment? | No (221(5)) | No (222(6)) |
| TDS under Chapter XIX-B on the payout | Section 221 has no provision excluding it | Chapter XIX-B does not apply to income paid by the company or fund (222(4)) |
| Statement to investor and authority | Form 73 to investor, Form 72 to the authority (rule 145) | Form 75 to investor, Form 74 to the authority (rule 145) |
| Carve-out | None in the section | Does not apply to an investment fund specified in section 224(10)(a) (222(7)) |
What does "same nature and same proportion" mean?
If the trust or fund earned interest, the investor has interest. If it earned dividend, the investor has dividend. The split is the same as the vehicle's split. The investor cannot treat a distribution as one lump sum of a different character (section 221(2), section 222(3)).
When is unpaid income treated as received?
Income earned by the trust or fund in the tax year but not paid or credited to the investor is deemed credited to the investor's account on the last day of the tax year, in the proportion in which he would have been entitled to it had it been paid in that year (section 221(3), section 222(5)). For tax year 2026-27 that day is 31 March 2027.
Once that income has been included in the investor's total income for the year it accrued, it is not included again in the year it is actually paid (section 221(5), section 222(6)).
What must the trust or fund report, and by when?
Sections 221(4) and 222(2) require the person paying or crediting the income on behalf of the vehicle, and the vehicle itself, to furnish a statement to the investor and to the prescribed income-tax authority, showing the nature of the income paid or credited in the tax year. Rule 145 of the Income-tax Rules, 2026 prescribes the forms and dates:
| Vehicle | Statement to Principal Commissioner or Commissioner | Statement to recipient |
|---|---|---|
| Securitisation trust | Form 72 | Form 73 |
| Venture capital company or fund | Form 74 | Form 75 |
| Quick reference | Deadline |
|---|---|
| Statement to the authority (rule 145(2)) | 15 June of the financial year after the tax year in which the income was paid, credited or distributed |
| Statement to the recipient (rule 145(2)) | 30 June of that financial year |
| Verification (rule 145(1)) | Authority statement filed electronically, verified by an accountant as defined in section 515(3)(b), with the Principal Commissioner or Commissioner having jurisdiction over the entity's principal office |
| Recipient statement (rule 145(3)) | Generated and downloaded from the portal specified by the Director General of Income-tax (Systems), verified by the person paying or crediting the income |
For income paid or credited in tax year 2026-27, that means 15 June 2027 and 30 June 2027.
How is the investor's income worked out? Two examples
Example 1: securitisation trust with part of the income unpaid (tax year 2026-27)
Assumptions: a securitisation trust earns Rs 12,00,000 of interest on its pool of loans during 2026-27. Meena holds 25% of the securitised debt instruments. The trust pays her Rs 2,00,000 before 31 March 2027 and holds back the rest of her share.
| Step | Working | Amount (Rs) |
|---|---|---|
| 1. Trust's interest income for the year | Given | 12,00,000 |
| 2. Meena's proportion | 25% of 12,00,000 | 3,00,000 |
| 3. Actually paid by 31 March 2027 | Given | 2,00,000 |
| 4. Deemed credited on 31 March 2027 | 3,00,000 - 2,00,000 | 1,00,000 |
| 5. Income taxed in 2026-27 (as interest) | 2,00,000 + 1,00,000 | 3,00,000 |
| 6. Rs 1,00,000 paid to her in 2027-28 | Already included in 2026-27 (section 221(5)) | Nil in 2027-28 |
The income is taxed as if Meena had lent directly. How much tax that produces depends on her own slab and other income, which this article does not compute.
Example 2: venture capital fund with a mixed income split (tax year 2026-27)
Assumptions: a venture capital fund receives Rs 8,00,000 of interest and Rs 2,00,000 of dividend from its venture capital undertakings in 2026-27. Ravi holds 10% of the fund. The fund pays him Rs 60,000 during the year.
| Step | Working | Amount (Rs) |
|---|---|---|
| 1. Ravi's share of interest | 10% of 8,00,000 | 80,000 |
| 2. Ravi's share of dividend | 10% of 2,00,000 | 20,000 |
| 3. Total attributable to Ravi | 80,000 + 20,000 | 1,00,000 |
| 4. Paid in the year | Given | 60,000 |
| 5. Deemed credited on 31 March 2027 | 1,00,000 - 60,000 | 40,000 |
| 6. Taxed in 2026-27 | Rs 80,000 as interest and Rs 20,000 as dividend | 1,00,000 |
Ravi cannot report the Rs 60,000 he received as one block of a different nature. Each rupee carries the character it had in the fund (section 222(3)).
Real-life scenarios
Meena and the Form 73. Meena invested in securities issued by a securitisation trust. In June she receives Form 73 from the trust showing the nature of the income credited for the year. She uses it to report the income under the right heads, including the part that was only deemed credited on 31 March. When the balance reaches her bank account the next year, she does not report it again.
Ravi's cash did not move, but his income did. Ravi's venture capital fund reinvested a large part of its interest income instead of distributing it. Ravi received almost nothing in 2026-27. He still has taxable income for that year, because section 222(5) deems the undistributed portion credited to him on 31 March 2027. His CA checks the Form 75 for the split before filing.
A fund manager's compliance walk-through. A venture capital fund pays out income in 2026-27. Its manager works out each investor's proportion, identifies the nature of each income stream, adds the deemed credit for anything unpaid, files Form 74 with the jurisdictional Principal Commissioner or Commissioner by 15 June 2027 after an accountant's verification, and makes Form 75 available to each investor by 30 June 2027.
Does the pass-through apply to every venture capital investment?
Not always. Section 222(7) says the section does not apply to income from investments in a venture capital company or fund that is an investment fund specified in section 224(10)(a). That definition covers a fund established in India as a trust, company, LLP or body corporate with a Category I or Category II AIF registration under the SEBI AIF Regulations, 2012 or the IFSCA (Fund Management) Regulations, 2022. Such funds are dealt with under section 224, which this article does not cover (see taxation of Alternative Investment Funds). If you hold units in a fund registered under the AIF Regulations, check which section applies before you report anything.
Schedule V (Sl. No. 6, read with section 11) also says that, in computing the total income of a venture capital company or fund, income from investment in a venture capital undertaking is not included, with no conditions in column D. That exclusion does not apply to an investment fund specified in section 224(10)(a). It is the reason the tax falls on the investor and not on the vehicle.
Common mistakes
- Waiting for the cash. Reporting income only when it is paid, and missing the 31 March deemed credit for the unpaid portion.
- Taxing the same income twice. Including the amount again in the year it is actually paid, which sections 221(5) and 222(6) prevent.
- Changing the nature of the income. Showing a distribution as a single category instead of following the nature and split in the statement.
- Ignoring the statement. Filing the return without Form 73 or Form 75, or without reconciling it to the Annual Information Statement.
- Assuming every fund is covered. Missing that section 222(7) carves out investment funds in section 224(10)(a).
- Missing the 15 June and 30 June dates. Both dates fall early in the following financial year, so the statements need to be ready before then.
Where this is in the Act
- Section 221: tax on income from securitisation trusts (investor, deemed credit, statement, definitions)
- Section 222: tax on income in the case of venture capital undertakings
- Schedule V, Sl. No. 6 and Note 4: income of venture capital companies and funds not included in their total income; definitions of venture capital company, fund and undertaking
- Section 224(10)(a): definition of "investment fund", the carve-out in section 222(7)
- Rule 145 (Income-tax Rules, 2026): Forms 72 to 75, accountant verification and the 15 June and 30 June dates
For a CA firm, the difficulty is rarely the arithmetic. It is collecting the statements, tying each one to the client's return and remembering which clients hold pass-through units. Finexo's practice management software keeps client-wise task lists and due dates in one place so that the June statements and the return checks do not slip. It does not compute tax or file the forms for you. For another provision that is built around forms and monthly due dates, see our guide to TDS on rent under the Income Tax Act 2025.
Frequently Asked Questions
Who pays tax on securitisation trust income under the Income Tax Act 2025?
The investor does. Under section 221(1), income the investor receives or that accrues to him from the trust is taxed as if the trust's investments had been made directly by him. Unpaid income is deemed credited to him on the last day of the tax year (section 221(3)).
What is the deemed credit on 31 March in sections 221 and 222?
Income earned by the trust or fund in the tax year that is not paid or credited to the investor is treated as credited to his account on the last day of the tax year, in the proportion he would have received it. It is taxed in that year, not when it is actually paid.
Is the income taxed again when it is actually paid later?
No. Section 221(5) and section 222(6) say income already included in the investor's total income for the year it accrued is not included again in the year it is actually paid.
Which forms do securitisation trusts and venture capital funds file under rule 145?
A securitisation trust files Form 72 with the Principal Commissioner or Commissioner and gives Form 73 to the investor. A venture capital company or fund files Form 74 and gives Form 75 to the investor. The authority statement is verified by an accountant.
What are the due dates for these statements?
Under rule 145(2), the statement to the authority is due by 15 June and the statement to the recipient by 30 June of the financial year after the tax year in which the income was paid, credited or distributed.
Does TDS apply to income paid by a venture capital fund?
Section 222(4) says Chapter XIX-B (tax deduction at source) does not apply to income paid by a venture capital company or fund under that Chapter. Section 222(7) excludes investment funds specified in section 224(10)(a) from the section altogether.