What is pass-through taxation?
In one sentence
The fund is not taxed on its investment income; each investor is taxed on their share, as if they had made the investment directly.
An everyday analogy
Like a courier: the parcel goes through the courier, but it is addressed to you.
How it flows
A real example
A Category II fund’s ₹5 lakh long-term gain on unlisted shares, allocated to you, is taxed in your hands at 12.5% plus cess: ₹65,000.
Why it matters
It decides who files and pays: you report the income each year, even if the fund has already deducted tax.
How it differs
Trust taxation is the opposite: the trustee pays tax on the fund’s income for the investors.
What the law says
Section 224(1)
224. (1) Irrespective of anything contained in any other provision of this Act and subject to the provisions of this section, where a person, being a unit holder of an investment fund, out of investments made in the investment fund, receives any income or any income accrues or arises to him, such income shall be chargeable to income-tax in the same manner as if, it were the income accruing or arising to, or received by, such person, had the investments made by the investment fund been made directly by him.
Income-tax Act, 2025 as amended by the Finance Act, 2026 · text as notified, amendment footnote numbers omitted · checked 24 October 2026 · Official text
Show answer
The investor, on their share.
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Meet the expert
CS Prashant Kumar
Company Secretary & Compliance Officer
Global Horizons Capital Advisors (IFSC) Private Limited — an IFSCA-licensed investment banker
Published in The Chartered Accountant (Jun 2025, Jan 2025, Mar 2024) and Chartered Secretary (Aug 2023)
Prashant Kumar is a seasoned Company Secretary and corporate governance strategist with more than 13 years of experience advising large corporates, promoter-led groups and global businesses on compliance, regulatory risk and board governance. In GIFT IFSC, the IFSCA regime is his day job rather than a research topic.