Taxation of interest income from venture capital fund

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Forum Sonpal (Querist)
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09 April 2014 Interest income from investments in Venture Capital Funds (VCF) The Finance Act, 2012 has amended section 10(23FB) & section 115U of the Income-tax Act, 1961 as a result of which from the FY 2012-13 onwards the VCF (Fund) is eligible for pass through under section 10(23FB) of the Act in respect of any income derived from venture capital investment and the income of the Fund will be chargeable to tax in the hands of its beneficiaries/investors in accordance with the provisions of section 115U of the Act. Let us take the example of a VCF which invests in real estate projects in the form of Non Convertible Debentures (NCD) and for a financial year earns accrued interest of Rs.10,000 for the investor and incurs expenses to the tune of Rs. 2,000 to earn such interest income for the investor. The Fund will obviously distribute only Rs. 8,000 to the investor as and when it receives the interest income. The queries in this regard are follows:- 1. How interest income is taxed in the hands of the investor ? whether on gross basis (ie. Rs.10,000) or net basis after expenses (ie. Rs.10,000 less Rs. 2,000 = Rs.8,000) ? Sec 115U does not make any specific reference to deductibility of expenses. Alternatively can the investor who declares such interest income as ?Income from other sources? in his tax returns claim such expenses as deduction u/s 57 of the Income Tax Act. In the above context it should be noted that the VCF gives annually a statement in prescribed form to the investors, which provides details of proportionate share of interest income due to each investor (Rs.10,000) and also the proportionate share of expenses incurred by the fund to earn the interest income (Rs.2,000). The VCF also files annually Form 64 with the Income Tax authorities in which they only declare the gross income (Rs.10,000 in this example) against the investors PAN number and do not show the expenses. 2. Sec 115U states that the income shall be taxed in the hands of the investor on an accrual basis in each financial year whether or not such income has been paid or credited to their account ? so what happens if the investor has offered the income for tax on accrual basis and a part of this income is not received by him in the later years?

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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26 July 2025 Here’s a detailed explanation of the **taxation of interest income from Venture Capital Funds (VCF)** under Sections **10(23FB)** and **115U** of the Income Tax Act, 1961, based on your scenario and queries:

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### Background:

* Section **10(23FB)** provides exemption to the income of a Venture Capital Fund (VCF), but the income is **taxed in the hands of the investors/beneficiaries** under **Section 115U**.
* Income is passed through to investors in their hands and taxed as per the nature of income (here, interest income).

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### Query 1: Taxability of Interest Income — Gross vs Net of Expenses

* The **VCF reports gross interest income** (Rs. 10,000 in your example) and also the **proportionate expenses** (Rs. 2,000).
* The VCF files Form 64 showing **gross income** against the investor’s PAN but **does not show expenses**.

**Tax Treatment:**

* As per Section **115U**, income is to be taxed on a **gross basis**, i.e., the **entire interest income (Rs. 10,000)** is taxable in the hands of the investor.
* **No specific provision in Section 115U allows deduction of fund’s expenses** against this income.
* Hence, the investor **cannot reduce income by expenses incurred by the fund** while declaring income under Section 115U.
* The expenses incurred by the fund are not deductible by the investor under **Section 57** (which normally allows expenses against income from other sources). This is because the income is deemed to be received from the VCF and not directly earned by the investor.

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### Query 2: Taxation on Accrual Basis & Non-Receipt of Income Later

* Section **115U** mandates that the income shall be taxed **on accrual basis** in each financial year **whether or not such income has been actually received or credited**.
* So, if the investor **includes Rs. 10,000 interest income in the current year on accrual basis**, but **does not receive part or full amount in later years**, the income is still taxable for the year in which it accrued.

**What happens if income is not received later?**

* The **income remains taxable in the year of accrual**.
* The Act does **not provide a specific relief** for non-receipt of accrued income.
* The investor can try to claim a **bad debt allowance or write off** (under Section 36(1)(vii) for business income or Section 57 for other sources, subject to conditions) in subsequent years if it becomes a bad debt.
* But this depends on facts and may be difficult for individual investors.

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### Summary:

| Aspect | Position |
| ---------------------------------------- | ----------------------------------------------------------------------------------- |
| Taxation of interest income from VCF | Taxed in hands of investor under Section 115U on **gross basis** (Rs. 10,000) |
| Deduction of fund expenses by investor | **Not allowed** under Section 115U or Section 57 |
| Income taxed on accrual basis | Yes, income taxable even if not received in that year |
| Relief for non-receipt of accrued income | No specific relief, may consider bad debt in subsequent years subject to conditions |

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If you want, I can also provide references to the relevant circulars or notifications issued by CBDT on this issue. Would that help?

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