In this article, we shall discuss how REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) will be taxed from 1st April 2023 (FY 2023-2024 or AY 2024-2025).
REITs and InvITs invest in commercial real estate properties and infrastructure assets via special purpose vehicles (SPV) through equity or debt instruments. This allows investors to invest in real estate and infrastructure assets by owning units or shares in them.
REITs are companies that own and operate income-generating properties, such as office buildings, shopping malls, apartments, hotels, and warehouses. REITs allow investors to invest in real estate without directly owning or managing properties. REITs generate income through rent and capital appreciation from the properties they own.
On the other hand, InvITs are similar to REITs, but they invest in infrastructure assets such as highways, power transmission lines, and pipelines. InvITs are designed to provide investors with a steady income stream from the tolls, fees, or rentals charged for using the infrastructure assets.
SEBI mandates that REITs and InvITs distribute at least 90% of the cash available to unitholders. This distributed income can come in various forms: dividend, interest, rental income and loan repayment to unitholders and taxable in the hands of the unitholder. Income received as interest should be passed on to the unitholder as only interest (and no other form).
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REITs and InvITs taxation rule from 1st April 2023 (from FY 2023-2024 onwards)
1. Taxation on sale (unchanged): The STCG tax rate on units held for less than 36 months is 15%. For older units, the LTCG tax rate is 10% on gains exceeding Rs. 1 lakh.
2. Interest income (unchanged): As per slab.
3. Rental income (unchanged): As per slab.
4. Dividend income (unchanged): the dividend income is taxable as per slab if the SPV has chosen to pay tax under section 115BB (reduce tax regime for corporates). If not, the dividend income is exempt.
5. Loan repayment: Prior to Budget 2023, this was assumed to be tax-free as the law was silent. Budget 2023 proposed taxing such income as income from other sources as the slab rate. However, after industry representation, an amendment was introduced as follows.
If the total amount distributed as loan repayment from the issue date exceeds the issue price, then the loan repayment income will be taxed as income from other sources per slab.
If the total amount distributed as loan repayment from the issue date is less than the issue price, then the loan repayment income will be taxed as capital gains at the time of sale. Technically, the loan repayment income will be deducted from the cost of acquisition. It will take several years before the loan repayment income exceeds the issue price.