In Budget 2023, the Finance Minister proposed to tax a part of distributions by REITs and InvITs, classified as ‘repayment of loans’ (or return of capital), in the hands of unitholders, as ‘other income’. This proposal will lead to a substantial increase in tax on gains from REITs and Invits.
Experts say that the new rules would result in 60 -150 basis points extra tax for investors, reducing the rate of their returns by 0.6 to 1.5 per cent. The fall in returns may discourage investors to invest in the Reits and Invits.
How income from investments in REITs and INvits is taxed?
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are both mutual fund-like investment vehicles. The distinction is in the underlying asset: while REITs own real estate, InvITs own infrastructure/under-construction assets.
“If a REIT received an interest payment, the amount is considered as interest income when disbursed to its investors. Because loan repayments are not considered income, many overseas investors have no tax to pay on them. If they treat it as income, as the Budget suggests, their tax rate on this type of income will no longer be zero. Foreign investors will now have to pay tax on these receipts and will not be eligible for the capital gains tax treatment,” says Sudarshan Lodha, Co-founder and CEO or Strata Property Management.
REIT vs Invit vs Fractional Ownership: Tax rules
|Avenues||Tax||Returns (Avg)||Lock-in period|
|REITS||STCG @ 15%· LTCG @ 10% (after 36 months above 1 Lac)· New addition of marginal rate of interest tax on repayment of loan (likely to increase by 150 basis points)||6 – 8%||Minimum 1 year|
|InvITs||STCG @ 15%· LTCG @ 10% (after 36 months above 1 Lac)· New addition of marginal rate of interest tax on repayment of loan (likely to increase by 150 basis points)||7-10%||Maximum 3 years|
|Fractional Ownership||STCG @ 15%· LTCG @ 10% (after 36 months above 1 Lac)||8-12% + capital appreciation during the exit||Minimum 3 Years|
How will the new changes impact investors?
In the future, investment entities will need to adjust the way they make such distributions because debt repayment may incur the maximum tax rate, says Lodha.
“The existing tax scheme provides a tax break for some types of dividend and interest income. The proposed regime does not seek to extend the concessional tax rates to debt repayment distributions, resulting in tax rates as high as 40% for international investors. While such investors may be able to rely on tax treaties, there are only a few that may provide tax exemption on such dividends,” he adds.
Lodha believes that the proposed tax changes may drive more investors towards fractional ownership of property.
“Unlike REITs, which have a model like mutual funds and offers lesser control on one’s investment, fractional ownership offers investors complete control on their investment. The recent taxation changes increased the tax burden on the REITs and Invits investment, making the asset class less attractive for investors. This is likely to draw discouraged investors towards the fractional investment route. Additionally, the bullish outlook for the CRE sector and India’s emergence as the global manufacturing and IT hub is expected to further contribute to the growth of this asset class,” he says.