Taxation of REITs and InVITs

Taxation of REITs (Real Estate Investment Trusts) and InVITs (Infrastructure Investment Trusts) in India depends on the nature of income received by investors. The key components of income include dividends, interest, capital gains, and repayment of debt.

1. Taxation at the Investor Level

Investors in REITs/InVITs receive income in four possible forms:

2. Taxation at the REIT/InVIT Level

• Pass-through structure: The REIT/InVIT itself is generally not taxed on interest or dividend income received from the Special Purpose Vehicle (SPV).
• Corporate tax applies at the SPV level before distributions to the trust.

3. Withholding Tax (TDS) on Distributions

• Interest income: 10% TDS for resident investors, 5% for non-residents.
• Dividend income: Subject to TDS as per investor’s applicable tax slab (if taxable).
• Capital gains: No TDS for Indian residents; applicable rates for non-residents.

REITs (Real Estate Investment Trusts)

• Rental Income: The main source of income for REITs comes from leasing commercial properties (office spaces, shopping malls, warehouses, etc.). The rental income is collected from tenants and distributed to investors.
• Capital Gains: When REITs sell properties for a profit, they earn capital gains. These gains are passed on to unitholders.
• Interest Income: REITs may also earn interest from investments in real estate debt instruments or loans.
• Other Income: REITs can invest in mortgage-backed securities (MBS) or similar financial instruments, generating additional income.

InVITs (Infrastructure Investment Trusts)

• Revenue from Infrastructure Projects: InVITs mainly generate income from toll collections (for roads), electricity transmission fees (for power infrastructure), or long-term contracts in the infrastructure space.
• Interest Income: InVITs can earn interest from loans or debt-related investments in infrastructure projects.
• Capital Gains: When InVITs sell infrastructure assets, they earn capital gains, which are distributed to investors.
• Other Income: This can come from equity investments in infrastructure projects or refinancing gains.

• Both REITs and InVITs pass through rental income (received from real estate or infrastructure assets) to their unitholders, but there are specific tax treatments at both the trust and investor level.

  1. At the Trust Level:

  • Rental income earned by REITs and InVITs is not taxed at the trust level (i.e., the REIT/InVIT itself does not pay tax on the income it receives from the underlying assets). Instead, the rental income is passed through to the unitholders, which means the tax burden is on the investors.

  2. At the Investor Level:

  • For REITs:

    • Dividend Distribution: If rental income is distributed as dividends, REITs are required to pay a Dividend Distribution Tax (DDT) at the trust level, which is taxed at 10% (on the dividend portion). However, this only applies if the SPV (Special Purpose Vehicle) paying the rental income to the REIT does not pay tax under the DDT scheme.
    • Taxable at Investor’s Slab Rate: If the REIT doesn’t pay DDT, then the rental income becomes taxable in the hands of the unitholder at their applicable tax slab rates.

  • For InVITs:

    • The tax treatment for rental income from infrastructure assets (like tolls or transmission fees) is similar to REITs. Income is passed to the unitholders, who are taxed at their applicable rates.
    • If the rental income is distributed as dividends, tax is paid at the unitholder level under the same principles as REITs, where the tax rate is based on the individual’s income tax bracket.

  3. Withholding Tax (TDS) on Rental Income:

  • For Resident Investors:
    • If rental income is distributed to Indian resident investors, there is no withholding tax on the rental income itself. The income is taxed at the investor’s applicable tax rate.
  • For Non-Resident Investors:
    • If non-resident investors receive rental income, a withholding tax of 5% applies on the rental income before distribution.

Dividend income from REITs and InVITs is subject to taxation both at the trust level (if applicable) and at the unit-holder level. Here’s a breakdown:

1. Taxation at the Trust Level (REITs/InVITs):

• Dividend Distribution Tax (DDT):
  • If the Special Purpose Vehicle (SPV) from which the REIT/InVIT derives its income pays dividends to the trust, the trust may be required to pay DDT (if applicable).
  • As of the latest tax structure, there is no DDT at the trust level for REITs and InVITs. Instead, income distributed by the trust is passed to investors, and taxes are applicable at the unit-holder level.

2. Taxation at the Investor (Unit-Holder) Level:

• Dividend Income:
  • Resident Investors:
    • Tax-free up to ₹10 lakh of dividend income in a financial year. Beyond ₹10 lakh, taxable at 10% under Section 115BBDA.
    • For dividends below ₹10 lakh, it is taxed at the individual’s income tax slab.
  • Non-Resident Investors:
    • Dividend income is subject to withholding tax at the rate of 20% (plus applicable surcharge and cess).
    • For foreign investors, the rate of tax may vary based on the Double Taxation Avoidance Agreement (DTAA) between India and the investor's home country.

3. Withholding Tax on Dividends:

• REITs and InVITs are required to deduct tax at source (TDS) on dividends distributed to unit-holders.
  • For Resident Investors: Generally, no TDS on dividend income if it’s below the threshold amount, but tax is deducted if the income exceeds the limit for TDS (such as ₹5,000 annually for individuals).
  • For Non-Resident Investors: TDS is deducted at 20% (subject to any DTAA benefits).

Summary:

• • For Resident Investors: Dividend income is tax-free up to ₹10 lakh, and taxed at 10% if over ₹10 lakh.
  • For Non-Resident Investors: Dividends are taxed at 20% TDS, subject to DTAA.
  • Tax on Distribution: REITs/InVITs themselves don’t pay tax on dividends, but withholding tax applies when they distribute dividends to unit-holders.

At the trust level, capital gains are generally not taxed. The pass-through nature of REITs and InVITs means that any capital gains they earn are passed on to the unitholders, who are then responsible for paying taxes on those gains. However, there are some important nuances:

1. REITs (Real Estate Investment Trusts):

• Capital Gains from Sale of Properties:
  • When a REIT sells properties (like commercial real estate), it earns capital gains. These gains are passed on to the unit-holders.
  • The REIT itself is not taxed on these gains, as it follows a pass-through structure.
  • These capital gains are distributed to unit-holders, and they are taxed at the investor level.

2. InVITs (Infrastructure Investment Trusts):

• Capital Gains from Sale of Infrastructure Assets:
  • Similar to REITs, when an InVIT sells infrastructure assets (like toll roads or power transmission assets), it earns capital gains.
  • These gains are passed to unit-holders, and the InVIT itself is not taxed on these gains.
  • The taxes on the capital gains are applicable at the unit-holder level.

3. Pass-through Nature:

• Both REITs and InVITs operate on a pass-through basis for capital gains. This means the gains are transferred directly to the unit-holders, who are then taxed according to their individual tax liabilities.

• Dividend Income:

  • TDS Rate: 20% on dividends.
  • DTAA: Reduced rates (typically 5% to 15%) depending on the agreement with the home country.

• Interest Income:

  • TDS Rate: 5% on interest payments.
  • DTAA: Can reduce the tax rate under the treaty.

• Rental Income:

  • TDS Rate: 30% on rental income.
  • DTAA: Reduced rate based on the agreement.

• Capital Gains:

  • Short-Term Capital Gains (STCG): 15% TDS if sold within 3 years.
  • Long-Term Capital Gains (LTCG): 10% on gains above ₹1 lakh; 20% with indexation.
  • DTAA: May offer a lower tax rate for capital gains.

• Other Considerations:

  • Tax Residency Certificate (TRC) is needed to claim DTAA benefits.
  • Non-resident investors typically don’t need to file returns if TDS is correctly deducted, but can claim refunds if over-taxed.

When a sponsor transfers assets or shares to a REIT/InVIT, the sponsor may incur capital gains tax. For assets held over 12 months, long-term capital gains (LTCG) tax applies at 12.5%, while for assets held less than 12 months, short-term capital gains (STCG) tax applies at 20%. The REIT/InVIT itself is generally not taxed on receiving these assets, as it is a pass-through entity. However, the sponsor must manage the tax on any gains from the transfer, and certain exemptions may apply under Section 47 if the transaction meets specific criteria.