REITs and InvITs have a complex tax system
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shylendrahoode
One of the less contentious provisions of the Taxation and Other laws (Amendment) Bill 2026, just passed by Parliament, is the proposal to change the taxation of dividends distributed by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The Bill seeks to make REITs and InvITs more investor-friendly by making them more tax-efficient. However, it takes a rather circuitous route to get there.REITs and InvITs are listed trusts which own a portfolio of operating real estate or infrastructure assets. They pool cash flows from these assets, to distribute them as income to their unitholders. As REITs and InvITs own most of their operating assets through Special Purpose Vehicles (SPVs), the tax incidence on SPVs has a significant bearing on their attractiveness to investors. Currently, dividends paid out by REITs and InvITs are taxed differentially at the investors’ end, depending on whether the SPVs have opted for the old or new tax regime. Dividends sourced from SPVs that are under the new tax regime are taxable at the slab rate for the investor, but dividends from SPVs under the old regime are tax-exempt. This tax treatment has made it difficult for investors to choose the right REIT or InvIT product, because this requires knowledge of how the underlying SPVs are taxed. More importantly, these rules force many REITs and InvITs to avoid moving their SPVs to the new tax regime. The new Bill seeks to untangle these complications by making dividend payouts from REITs and InvITs tax-free in all cases, irrespective of the tax status of their SPVs. REIT and InvIT SPVs migrating to new regime will need to pay a higher surcharge of 25 per cent on their corporate tax, instead of the current 10 per cent.Despite this sting in the tail though, most REITs and InvITs will likely make the transition to the new regime. For one, with one part of their distributions exempt from tax, they can now become a slightly more tax-efficient income vehicle for high net worth investors than fixed deposits, bonds or debt mutual funds. While the entire interest on bonds and deposits gets taxed at the investor’s slab rate, REITs and InvITs will now be able to shield the dividend part of their distributions from tax. Two, SPVs shifting to the new tax regime can boost their own cash flows available for distribution.However, even after this concession, the taxation of REITs and InvITs remains extremely complex. income from a REIT or InvIT is taxed at multiple rates, depending on the original source of that income. The dividend and interest income is taxed at the investor’s slab rate but distributions from repayment of debt are subject to capital gains tax. This tax treatment requires the investor to be aware of the REIT or InvIT’s income sources and keep track of its distribution history, to pay his taxes correctly. Moving REITs and InvITs to a simpler tax regime like other financial instruments is a necessary step to popularising them.Published on August 12, 2026
