Summary of this article
REITs and InvITs enjoy pass-through status, helping avoid double taxation for investors.
Income is taxed differently based on its nature—rent, dividends, interest, or capital gains.
Recent changes clarify taxation of return of capital while protecting investor yields.
Holding period and structure significantly influence the final tax outgo and net returns.
With the growing prominence of real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), the real estate investing landscape in India is undergoing a significant transformation. To gain exposure to real estate and infrastructure assets, these pooled investment vehicles now offer both retail and institutional investors a regulated, liquid, and relatively tax-efficient route.
For investors seeking optimised post-tax returns, understanding the taxation of income from these instruments is important.
What Are Reits and InvITs
Reits are trusts that hold real estates, such as office buildings, retail spaces, and warehouses which are income-generating and are regulated by the Securities and Exchange Board of India (Sebi).
“InvITs, on the other hand, are trusts that focus on infrastructure assets, such as toll roads, power transmission networks, and renewable energy projects. Both structures are operated through special purpose vehicles (SPVs) and distribute a significant portion of their cash flows to unit-holders, ensuring steady income flow to the investors,” says Parag Jain, tax head at 1 Finance, a personal finance firm.
Pass-Through Tax Status: The Foundation:
Under the Income-tax Act, 1961, these trusts provide a key feature for investors i.e., pass-through status, which means that income flows through to the investors and is taxed in their hands based on nature and residency, whereas the trust is generally not taxed on the income it receives. This avoids double taxation on trusts and investors.
Income Streams and Their Tax Treatment
Rental Income by Reits: If the Reit owns property directly, the distribution of rental income is taxed as “Income from House Property” in accordance with the slab rates in the hands of the investor.
“If the trust earns rent through SPVs and receives dividends, the distribution may be treated differently, often as dividend income and is taxed accordingly,” adds Jain.
Rental Income by Investors: Direct rental income from house property is computed under Section 22 of the Income-tax Act, 1961 after deducting municipal taxes, with a standard 30 per cent deduction under Section 24(a) on the net annual value, and deduction of up to Rs 2 lakh on interest under Section 24(b) for let-out properties.
Dividend and Interest: Dividend or interest distributions received by investors maintain their character in accordance with the investor’s treatment of the same.
Says Jain: “Taxation on dividend income is according to the slab rates of investors and may be changed depending on whether the SPV has opted for concessional corporate tax regimes. Interest income is taxed at slab rates under “Income from Other Sources”, with applicable deduction of tax at source (TDS), too.”
Loan/Return of Capital: Previously, distributions were classified as repayment of debt or return of capital and were not taxed upon receipt. To bring clarity and remove unintended tax benefits, there were legislative changes effective from the 2023 budget. However, to provide relief to unitholders and preserve yield, amendments allow adjustments for acquisition cost.
Capital Gains: Gains arising from selling Reit/InvIT units are treated as capital gains.
“Units held for more than 24 months qualify as long-term capital assets and are taxed at a concessional rate (around 12.5 per cent above exemption thresholds, subject to securities transaction tax or STT). Short-term gains (less than 24 months) attract around 20 per cent on listed instruments under Section 111A,” says Jain.
Conclusion
Reits and InvITs are no longer to be treated as niche products, as they are becoming central to real estate and infrastructure investing, offering liquidity, diversification, and regular income. Yet, their tax treatment, especially rental income and return of capital, gives reasons that can materially impact net returns. For investors and tax professionals alike, mastering this ‘new tax playbook’ is essential for informed decision-making and optimising returns on their investments.
