How InvIT, REIT income is taxed

Over the last few years, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) have emerged as a popular investment option for those who want a regular income flow and are comfortable with taking on some risk.

The soaring equity market valuations and dwindling fixed income returns have only added to their appeal. With the government laying out a roadmap for monetisation of infrastructure assets, InvITs are expected to gain further ground.

An InvIT/ REIT pools money from investors (unitholders) to invest in a portfolio of income-generating infrastructure assets (80 per cent in operational assets) via subsidiaries (SPVs). REITs invest in real estate projects and InvITs in infrastructure assets, such as power transmission or road projects. The unitholders receive a regular payout, at least once every six months. Also, as units of publicly issued InvITs/REITs trade like shares on the exchanges, they offer an opportunity for capital appreciation.

Investors, however, need to wade through their complex taxation. The income of an InvIT/ REIT is passed on to unitholders in the form in which it’s received and is taxed as such.

Distributable surplus

An InvIT/ REIT receives cash flows from its project SPVs in the form of: a) dividends in return for the stake held b) interest and c) principal repayment on loans extended to them. Any other income at the InvIT/ REIT level such as capital gains from assets sold and not re-invested, and return on surplus cash invested, too, gets added to this.

Apart from this, if a REIT holds any real estate asset directly and not via an SPV, then the income flows to it in the form of rent (and not interest and dividend) and gets added as such.

All expenses incurred at the InvIT/ REIT level are deducted from the total cash inflow to arrive at the net distributable surplus (NDS). Unitholders must be paid at least 90 per cent of the NDS. A break-up of the components of the distribution is usually available on the websites/ presentations of the respective InvIT/ REIT.

Tax treatment

Distribution: The interest component of the NDS is taxed at your income tax slab rate. The dividend, too, is taxed at your slab rate if the project SPVs of the InvIT/ REIT have opted for the new concessional tax regime under section 115BAA of the IT Act. The dividend is tax-exempt if the project SPVs have not opted for the concessional tax.

Also as Hemal Mehta, Partner, Deloitte India, explains, before the interest and dividend are paid out, a 10 per cent withholding tax (for resident investors) is deducted by the InvIT/ REIT, against which the investor can claim credit.

The loan repayment component represents return of capital and is not subject to tax. Any other income at the InvIT/ REIT level such as capital gains on any asset sold or interest on fixed deposits which is passed on to the unitholders, too, is tax-exempt in their hands.

Powergrid InvIT, India Grid Trust and IRB InvIT Fund are the three publicly listed InvITs open to retail investors.

IRB InvIT Fund has distributed ₹41.30 per unit (₹30 as interest and ₹11.30 as return of capital) since its listing in May 2017 until March 31, 2021. Since most of the trust’s SPVs are loss-making (PAT level), there have been no dividends.

In case of India Grid Trust, almost all the distributions since its listing in June 2017 have been in the form of interest income. As of June 2021, India Grid Trust had opted for concessional tax for all except one of its SPVs. Any future distributions in the form of dividends will, therefore, be taxed accordingly.

Powergrid InvIT, which listed recently has not yet made any distributions. Four of the InvIT’s five project SPVs have opted for concessional tax.

In the REIT space, you have Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust, all publicly listed.

In the June 2021 quarter, they distributed ₹5.64, ₹4.60 and ₹6 per unit, respectively of which 80 per cent, 92 per cent and 24 per cent was tax-free in the hands of the investors.

Capital gains: If a unitholder sells his/her InvIT/ REIT units after holding them for up to 36 months, the short-term capital gains are taxed at 15 per cent (plus applicable surcharge and cess) without indexation benefit.

If the units are sold after being held for over 36 months, long-term capital gains (exceeding ₹1 lakh a year including from all equity investments) are taxed at 10 per cent (plus applicable surcharge and cess) without indexation benefit.

These rates are applicable to all REITs (which have to be mandatorily listed) and the listed InvITs.

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