Key Highlights
- REIT/InvIT distributions have 4 components — each taxed differently
- Interest income from REIT: taxable at slab rate
- Dividend from REIT: taxable at slab rate (DDT abolished)
- Return of capital: NOT taxable — but reduces cost of acquisition
- Capital gains on sale of REIT/InvIT units on exchange: LTCG 12.5% (36 months for LTCG, unlike 12 months for equity)
- REIT/InvIT listed on recognised exchange: LTCG holding period = 36 months
1. How REIT/InvIT Distributions Work
REITs collect rent from commercial properties and distribute 90% of net distributable cash flow to unitholders as mandatory distributions. InvITs operate similarly with infrastructure project cash flows. These distributions have four components:
- Interest: From debt instruments held by the REIT/InvIT
- Dividend: From the Special Purpose Vehicles (SPVs) holding the assets
- Return of Capital: Repayment of the unitholder investment amount
- Other income: Rent passed through (taxable at slab)
2. Taxation of Each Distribution Component
| Distribution Component | Tax Treatment in Unitholder Hands | TDS Rate |
|---|---|---|
| Interest income | Taxable at slab rate | 10% (resident); 5% (NRI on listed bonds) |
| Dividend income | Taxable at slab rate | 10% (resident, if >Rs 5,000) |
| Return of capital | NOT taxable — reduces cost of units | Nil TDS on return of capital |
| Other income (rent passthrough) | Taxable at slab rate | 10% |
3. Capital Gains on REIT/InvIT Units
When you sell REIT or InvIT units on the stock exchange:
- Holding period for LTCG: More than 36 months (unlike 12 months for equity) — because REIT/InvIT units are treated more like real estate than equity
- LTCG rate: 12.5% (without indexation) — same as property LTCG
- STCG rate: Normal slab rate (if held 36 months or less)
- STT is applicable on exchange-traded REIT/InvIT units — no surcharge benefit
4. Return of Capital: Cost Reduction
Return of capital distributions are not taxable when received. However, they reduce the cost of acquisition of the REIT units for future capital gains computation. For example, if you bought REIT units at Rs 300 and received Rs 10 as return of capital over time, your cost of acquisition for capital gains becomes Rs 290. This deferral mechanism means the tax on return of capital is ultimately paid when you sell — as a higher capital gain.
5. REIT vs Direct Real Estate Investment: Tax Comparison
| Feature | REIT | Direct Property |
|---|---|---|
| Rental income | Taxable at slab (passed through as interest/dividend/other) | Taxable at slab (after 30% standard deduction) |
| Capital gains on sale | 12.5% LTCG after 36 months | 12.5% LTCG after 24 months |
| 30% standard deduction on rent | Not available (tax at gross) | Available (Section 57 equivalent) |
| Liquidity | High (exchange-traded) | Very low |
| Minimum investment | 1 unit on exchange (Rs 300-400) | Rs 50L+ |
6. Why TaxClue
REIT/InvIT distributions involve multiple income components, each with different tax treatment and TDS. Reporting them correctly in ITR requires detailed analysis of the distribution statements. TaxClue files ITR with accurate REIT/InvIT income computation. Contact us for REIT/InvIT tax advisory and ITR filing.