De-jargoned: Pass-through income

While filing your tax returns for the financial year 2015-16, you may come across some of the new sections that have been introduced by the tax department in the revised income tax return (ITR) forms. One such section is “Schedule PTI,” where an assessee has to disclose details of any pass-through incomes (PTI) that she has earned during the last financial year.

WHAT IS PASS-THROUGH INCOME?

Typically, a specified percentage of tax is deducted at each source of income, under the provision of tax deducted at source (TDS). For instance, if you have a fixed deposit with a bank and annual interest from the deposit crosses 10,000, the bank is bound to deduct TDS, before crediting the interest into your account. Similarly, even if the source of income is salary, employers are required to deduct TDS on the monthly salary of the employee, according to the income tax slab rate applicable to her.

Contrary to this, incomes from certain sources qualify as PTIs. These incomes are not taxed at the source or origin; instead they are passed on to the actual recipient of the income, without any deduction. Sections 115 UA and 115 UB of the Income-tax Act, 1961, provides that any distribution of income by a business trust or investment fund to its investors (unit holders) shall be paid to them without any deduction of tax. Income distributed by such funds or trust is taxable directly in the hands of investors in the same nature, and not in the hands of the funds or trust. These funds and trusts are also required to report such distribution of income by them to the tax authority.

With the insertion of Schedule PTI in the ITR forms, the tax authority will be able to reconcile the data and track defaulters who try to evade paying taxes on such incomes.

WHAT IS SCHEDULE PTI?

Schedule PTI has been inserted in all ITR forms except ITR-1 (which is used by individuals who have salary as their primary source of income, and may have income from one house property and other sources). Under this schedule, an individual or Hindu Undivided Family (HUF) will have to provide details of pass-through incomes from business trust or investment funds such as venture capital funds or real estate investment trusts. The schedule intends to capture details of income from different sources under the pass-through mechanism received by investors.

WHAT SHOULD YOU DO?

Details that need to be disclosed include name of the business trust or investment fund, its Permanent Account Number (PAN), income head, amount of income and TDS, if any. So, while filing your tax return this year make sure you do not forget to enter details of any pass-through incomes.