Big tax change for REIT, InvIT investors: What the 2026 Taxation Bill means for investors

The amendment seeks to remove an anomaly that arose after recent changes to the corporate tax framework. With this amendment, eligible dividend distributions by REITs and InvITs will once again be exempt in the hands of investors, irrespective of whether the underlying Special Purpose Vehicle (SPV) has opted for the concessional corporate tax regime.

The proposal is being seen as a tax rationalisation measure aimed at bringing greater certainty and uniformity to the taxation of REIT and InvIT investors.

What exactly has changed?

Under the existing framework, dividend income distributed by REITs and InvITs to investors was generally exempt. However, this exemption was not available if the underlying SPV had opted for the concessional corporate tax regime.

As a result, investors receiving such dividend distributions had to pay tax simply because the SPV had chosen a different corporate tax regime.

According to Shaily Gupta, Partner at Khaitan & Co, the Amendment Bill removes this distinction.

“The Amendment Bill seeks to bring greater uniformity and certainty to the taxation of REIT and InvIT distributions. It proposes to exempt dividend income distributed by REITs and InvITs to unitholders, irrespective of whether the underlying SPV has opted for the concessional corporate tax regime.”

She adds that the amendment effectively delinks the tax treatment of dividend distributions in the hands of investors from the tax regime chosen by the underlying SPV.

Why did the government make this change?

The amendment addresses an unintended consequence of the MAT reforms introduced through the Finance Act, 2026.

Following those changes, companies could have been encouraged to shift to the concessional corporate tax regime. However, such a move could also have made dividend distributions taxable for REIT and InvIT investors, even though there was no change in the underlying investment.

“This meant investors could face an additional tax merely because of a change in the SPV’s tax regime, without any change in the underlying investment or distribution,” Gupta explains.

She says the government’s objective is not to offer a fresh tax concession but to eliminate this anomaly and provide certainty to investors through a more consistent tax framework.

Who stands to benefit the most?

The amendment is expected to benefit all categories of REIT and InvIT investors, but the biggest gain may be for individuals in higher tax brackets.

According to Gupta, the impact is likely to be most significant for high-net-worth individuals (HNIs) because they would otherwise have paid tax on dividend income at their applicable marginal tax rates.

For non-resident Indians (NRIs), the amendment also brings greater certainty by reducing potential disputes over the taxability of dividend income and the need to rely on tax treaty provisions.

Institutional investors may see a comparatively smaller direct tax benefit because many are already subject to lower effective tax rates or different tax rules. However, they too benefit from a simpler and more predictable tax framework.

There’s also a higher surcharge for SPVs

While the Bill restores the investor-level exemption, it also proposes a higher surcharge for SPVs that opt for the concessional corporate tax regime.

The surcharge is proposed to increase from 10% to 25%.

According to Gupta, this would increase the effective tax rate from around 25.17% to 28.6% for SPVs covered under Section 200, and from 17.16% to 19.5% for new manufacturing SPVs covered under Section 201.

“The higher surcharge effectively shifts part of the tax burden from the investor level to the SPV level,” she says.

However, she notes that although the higher tax at the SPV level could marginally reduce the post-tax profits available for distribution, investors in higher tax brackets may still end up paying less tax overall because they no longer face tax on eligible dividend income.

Will investors earn higher post-tax returns?

Experts say the amendment should primarily be viewed as a tax rationalisation exercise rather than a broad tax giveaway.

“The government has effectively paired the investor-level dividend exemption with a higher surcharge at the SPV level,” Gupta says.

However, she points out that investors in the highest tax brackets could still see a meaningful improvement in post-tax returns because dividend income would otherwise have been taxed at marginal rates that can be significantly higher than the additional tax imposed at the SPV level.

Another major benefit is simplicity.

Investors will no longer have to track which corporate tax regime has been chosen by the underlying SPV to determine whether their dividend income is taxable.

Does the amendment affect other REIT and InvIT payouts?

No. The proposed amendment is limited to eligible dividend income distributed by business trusts.

It does not change the tax treatment of other components of REIT and InvIT distributions, including interest income, rental income, repayment of debt and
capital gains.

These will continue to be taxed under the existing rules.

Summing up…

The proposed amendment removes an unintended tax anomaly that had linked investors’ tax liability to the corporate tax regime chosen by the underlying SPV.

By restoring the exemption for eligible dividend distributions and making the tax treatment uniform, the government aims to provide greater certainty for investors while maintaining overall tax neutrality through a higher surcharge on SPVs.

For REIT and InvIT investors—especially those in higher tax brackets—the change could improve post-tax outcomes and simplify tax compliance, while also allowing underlying entities to opt for the concessional corporate tax regime without creating unintended tax consequences for their investors.

Disclaimer: This article is for informational purposes only and should not be construed as tax or investment advice. Investors should consult a qualified tax professional or financial adviser before making investment decisions based on changes in tax laws.

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