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
Legal Reference
Sections 195-196 (capital gains on REIT/InvIT), Section 393 (TDS on REIT distributions), ITA 2025 | SEBI (Real Estate Investment Trusts) Regulations 2014 | SEBI (Infrastructure Investment Trusts) Regulations 2014
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.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
How is REIT income taxed in India?
REIT distributions have multiple components taxed differently under ITA 2025. Interest income from REITs is taxable at the unitholder slab rate with TDS at 10%. Dividend income from REITs is also taxable at slab rate with TDS at 10% (if over Rs 5,000). Return of capital (repayment of investment) is not taxable when received but reduces the cost of acquisition for future capital gains. Capital gains on selling REIT units on the exchange are LTCG at 12.5% if held more than 36 months.
What is the holding period for LTCG on REIT units?
Unlike equity shares (12 months), the holding period for long-term capital gains on REIT and InvIT units is 36 months (3 years) under ITA 2025. If you sell REIT units after holding for more than 36 months, LTCG at 12.5% (without indexation) applies. If sold within 36 months, STCG at normal slab rates applies. This longer holding period reflects the real-estate nature of these instruments.
Is return of capital from REIT taxable?
No, return of capital distributions from REITs are not taxable when received. They are treated as a repayment of your investment, not as income. However, each return of capital reduces your cost of acquisition for the REIT units. This means when you eventually sell the units, your capital gains will be higher because of the lower cost basis. The tax is effectively deferred to the time of sale.
How does REIT compare to direct property investment for tax?
REIT and direct property investment have some key tax differences. REIT rental income (passed as distributions) is taxed at full slab rate, while direct property rent gets a 30% standard deduction first. Capital gains on REIT units qualify as LTCG after 36 months, while direct property qualifies after 24 months. However, REIT offers far better liquidity, lower minimum investment, and passes through the 90% distribution mandate which provides regular income.
What TDS does a REIT deduct on distributions?
REITs deduct TDS at 10% on interest distributions to resident unitholders (under Section 393 of ITA 2025) and on dividend distributions exceeding Rs 5,000 per year. For NRI unitholders, TDS on interest is typically 5% on listed bond interest and 20% on other income (or applicable DTAA rate). Return of capital distributions are not subject to TDS. The TDS is reflected in the unitholder Form 26AS and must be claimed as credit when filing ITR.
