As the government plans to launch public infrastructure investment trusts (InvITs) to monetise infrastructure assets, retail investors would have an opportunity to earn assured higher returns as compared to traditional instruments such as bank deposits. These can help them in diversifying the portfolio, generate steady returns in the long run and benefit from the country’s infrastructure development.
The InvITs list on the stock exchange and have underlying assets in revenue-generating projects such as toll roads or power transmission lines. Last year, NHAI InvIT issued non-convertible debentures (NCDs) to raise `1,500 crore with 7.9% interest semi-annually and effective yield at 8.05%. About 25% of the NCDs were reserved for retail investors and the issuance had 13-, 18- and 25-year bonds.
Generate steady income
In fact, NCDs are fixed income products which are issued by InvITs to monetise the infrastructure assets publicly. As these trusts distribute around 90% of the total cash flow to its investors on a half-yearly basis, retail investors can generate steady income for a long period. Investors also earn dividend income when the InvITs have surplus cash flow. The units are traded on the stock exchanges, investors can sell units for a profit and generate capital gains.
The beta of InvITs is low compared to listed companies, which can help generate higher returns. Investing in InvITs is less risky than direct investment in infrastructure stocks.
Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, says InvITs are innovative pooled vehicles which allow monetisation of infrastructure assets while simultaneously providing investors the opportunity to invest in infrastructure assets without actually owning them. “The regulatory framework governing these innovative pooling vehicles makes investments in InvITs, a low to moderate risk investment as 80% of investment is required to be made in completed and revenue generating assets, coupled with lucrativeness of steady returns as InvITs are required to distribute at least 90% of net distributable cash flow on a half-yearly basis,” he says.
However, investment in infrastructure has a long gestation period which may impact cash flow and returns. An investor should be mindful of the type of InvIT he is investing in, whether it is privately held or publicly held. The type of infrastructure project and the returns which it is likely to generate over the years must be evaluated.
Taxation on InvITs
The tax treatment for InvITs is mainly related to the income earned by the InvITs and distributions made by it to the unit holders.
Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm, says for listed NCDs, there are types of incomes — interest and capital gains. Interest is taxable at normal slab rates. The taxability of capital gains depends on the holding period of the NCDs. “If a listed NCD has been sold after 12 months from the date of allotment, the gains made on such sale is said to be a long-term capital gain taxed at 10% plus applicable surcharge and cess. If sold within 12 months they will be considered short term capital gains and taxed at the normal slab rates,” he says.
In Finance Bill 2023, the government has proposed that distribution by way of ‘repayment of debt’ to the unitholders will be taxed under the head ‘income from other sources’.
- InvITs have underlying assets in revenue-generating projects such as toll roads or power transmission lines
- They are required to distribute at least 90% of net distributable cash flow on a half-yearly basis
- Investors can earn dividend income if the InvITs generate surplus cash flow