REAL ESTATE INVESTMENT Trusts (REITs) and Infrastructure Investment Trusts (InvITs) enable investors to participate in income-generating assets through professionally managed, exchange-listed vehicles. REITs invest in commercial real estate assets such as office parks, malls, warehouses and data centres, while InvITs focus on infrastructure assets including roads, power transmission networks, renewable energy projects and telecom towers.
Although the investment proposition is relatively straightforward, the tax treatment of income from REITs and InvITs is more complex. Operating under a pass-through regime, these distribute multiple streams of income, each subject to distinct tax rules. Consequently, understanding the tax character of each distribution is essential for accurate tax reporting and compliance by unitholders.
One distribution, multiple tax treatments
The key tax feature of a business trust is its pass-through status, whereby income generally retains its character and is taxed only once, either in the hands of the unitholder or, in certain cases, at the Special Purpose Vehicle (SPV) level with subsequent distributions remaining exempt. This helps avoid economic double taxation.
Accordingly, distributions from a REIT or InvIT may comprise different income streams, such as interest, dividends, or rental income, each subject to distinct tax treatment. Unitholders should therefore review Form 77 (erstwhile Form 64B) carefully, as it provides the break-up of distribution components and forms the basis for determining the applicable tax treatment and reporting requirements. Apart from distributions made by the trust, any gain arising on the transfer, sale, or redemption of REIT/InvIT units by the unitholder is treated as ‘Capital Gains’.
Key compliance takeaways
Accurate record-keeping and proper disclosure in the ITR can help avoid errors and ensure that the correct tax treatment is claimed.
Review Form 77: This statement provides a detailed break-up of the various components of distributions received from REITs and InvITs and is essential for determining the correct tax treatment and reporting of income.
Maintain investment records: Unitholders should preserve acquisition cost details, distribution statements and records of return-of-capital distributions to facilitate accurate capital gains computation on exit.
Making the appropriate disclosures: Unitholders should ensure correct disclosures in the Schedule Pass Through Income (PTI) of the ITR Form.
While the tax treatment of REIT and InvIT distributions requires careful attention, unitholders who understand the character of each income stream and review Form 77 diligently can navigate the framework effectively.
The writer is tax partner, EY India. Greg A Bansiwar, senior tax professional, also contributed to the article.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.