A payment from a real estate investment trust or an infrastructure investment trust is not one type of income. It can include interest, dividend, rent and a repayment of debt and each part is taxed differently so the tax on the ₹10,000 of distributions can change depending on how the trust splits it.
REIT and InvIT taxation in India has two parts: the tax on the distributions, which are taxed in the hands of the unitholder by type and the tax on the capital gains when the units are sold. The trust sends a statement that shows the split and that statement decides what goes into the income tax return.
How each part of a distribution is taxed
| Component | Resident unitholder | Nonresident unitholder |
|---|---|---|
| Interest from the special purpose vehicle | Taxed at the slab rate with tax deducted at source | Taxed at 5% under domestic law or a lower treaty rate, with tax deducted at the same rate |
| Dividend from the special purpose vehicle | Taxable at the slab rate where the SPV pays tax at the concessional rate and exempt where it does not. Tax deducted at source of 10% applies on the part. | Taxed at 10% or a lower treaty rate |
| Rental income | Taxed at the slab rate with tax deducted at source of 10%. The tax deducted at source is refundable if the income turns out to be exempt | Taxed at the rates in force or the treaty rate |
| Repayment of debt or return of capital | Not taxed on receipt and it reduces the cost of the units | Same treatment |
The trust splits each distribution into these parts in an annual statement and investors rely on it to report the right amounts. Tax deducted at source thresholds and the exact rates differ across the components so the figures in the statement and in Form 26AS are the ones to follow.
Capital gains when units are sold
| Holding period | Tax on the gain |
|---|---|
| 12 months or | 20% short-term capital gains tax |
| More than 12 months | 12.5% on gains above ₹1.25 lakh in a financial year with no indexation |
The cost of the units is reduced by the repayments of debt received over the years so the taxable gain is the sale price minus the reduced cost. The rule for units is different and a sale of unlisted units is taxed at other rates.
An example
As an illustration an investor buys 1,000 units at ₹100 each for ₹1,00,000 and receives ₹10,000 in distributions during the year. The investor is in the 30% slab, which’s 31.2% with cess.
| Component | Amount | Tax treatment |
|---|---|---|
| Interest | ₹4,000 | Taxed at the slab rate |
| Dividend ( part) | ₹3,000 | Taxed at the slab rate |
| Rental income | ₹1,000 | Taxed at the slab rate |
| Return of capital | ₹2,000 | Not taxed and the cost of the units falls to ₹98,000 |
The taxable distributions are ₹8,000. The tax at 31.2% is about ₹2,496. Tax deducted at source of 10% on that amount is ₹800 so about ₹1,696 is still due at filing. If the units are sold after 12 months for ₹1,10,000 the gain is ₹12,000 over the reduced cost of ₹98,000 which sits within the ₹1.25 lakh exemption and attracts no tax.
REIT compared with InvIT
| Feature | REIT | InvIT |
|---|---|---|
| Assets | Income-producing estate such as offices and malls | Infrastructure such as roads, power lines and pipelines |
| Rental income | A main source of distributions | Generally not a source since the income is mostly interest and dividend |
| Tax on distributions | By component: interest, dividend, rent and repayment of debt | By component: interest, dividend and repayment of debt |
| Tax on selling listed units | 20% or 12.5% by holding period | 20% or 12.5% by holding period |
Reporting in the income tax return
| Step | What happens |
|---|---|
| 1. Get the statement | The trust issues a statement that splits the years distributions into interest, dividend, rent and repayment of debt. |
| 2. Match with tax records | Form 26AS and the Annual Information Statement show the tax deducted at source. The amounts reported. |
| 3. Report each component | Interest and dividend go under income from sources and rent goes under the head that applies to it. |
| 4. Report capital gains | Gains on sale go under capital gains and an income tax return form that supports capital gains, such as ITR-2 is needed. |
| 5. Adjust the cost of the units | Repayments of debt received over the years reduce the cost used for the gain calculation. |
What investors should take from this
The yield printed on a REIT or InvIT is a -tax figure and can mix taxed and untaxed parts. Reading the component split in the statement and counting the tax deducted at source and the slab rate shows what the investor actually keeps.
Kuvera offers mutual funds and investors who prefer a diversified route to real estate and infrastructure can compare the tax treatment of such funds with direct REIT and InvIT units.
Frequently Asked Questions
1. How is income from a REIT taxed in India?
By component. Interest and rent are taxed at the slab rate dividend is taxed in some cases and repayment of debt is not taxed on receipt but reduces the cost of the units.
2. What is the tax on selling REIT units?
For units 20% on gains from units held 12 months or less and 12.5% on gains above ₹1.25 lakh in a financial year for units held longer.
3. Is tax deducted at source deducted on REIT and InvIT distributions?
Yes, on the interest, dividend and rental components at 10% for residents. The rate for non-residents differs by component and treaty.
4. What is repayment of debt in a REIT payout?
It is a return of part of the money invested. It is not taxed on receipt. It reduces the cost of the units, which raises the gain when the units are sold.
5. How are Invit payouts reported in the ITR?
Each component is reported using the trusts statement, matched with Form 26AS and the AIS and capital gains are reported separately.
Investments in securities are subject, to market risks. Read all documents carefully. Tax rules mentioned here reflect rules and can change.
