A Complete Taxation Guide for REITs and InvITs in India (As of January 2026)

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have emerged as popular investment options in India, offering investors exposure to income-generating commercial real estate and infrastructure assets without the hassles of direct ownership. Regulated by the Securities and Exchange Board of India (SEBI), these vehicles pool funds from investors to acquire and manage assets, distributing a significant portion of their cash flows as dividends or returns.

Both REITs and InvITs are classified as “business trusts” under the Income Tax Act, 1961, and benefit from a pass-through taxation regime under Section 115UA. This means the trust itself is generally not taxed on certain incomes; instead, the income flows directly to unit holders (investors) and is taxed in their hands based on its nature. Most structures involve investment through Special Purpose Vehicles (SPVs), which helps maintain this pass-through status.

Key Features and Recent Developments

REITs primarily invest in completed, rent-yielding commercial properties such as offices, malls, and warehouses. InvITs focus on infrastructure assets like roads, power transmission, and telecom towers, generating income from tolls, tariffs, or annuities.

A major regulatory shift took effect from January 1, 2026: REITs are now classified as equity-related instruments for mutual funds and Specialized Investment Funds (SIFs), following a SEBI circular dated November 28, 2025. This enhances their appeal for portfolio inclusion. InvITs, however, remain classified as hybrid instruments.

Tax rules for both are largely aligned, with minor differences in income types (e.g., direct rental income is more common in REITs).

Pass-Through Taxation Mechanism

Under Section 115UA, income such as interest, dividends (from SPVs), and rental income (for REITs) is exempt at the trust level (via Sections 10(23FC) and 10(23FCA)), provided the SPV pays corporate tax at normal rates. This income retains its character and is taxed directly in the hands of unit holders. Trusts must distribute at least 90% of net distributable cash flows quarterly to qualify for pass-through benefits.

Taxation of Distributions to Unit Holders

Distributions are categorized into components like dividends, interest, rental income, and repayment of capital. The trust provides an annual breakdown in Form 64B for accurate reporting.

For Resident Investors (Individuals/HUFs):

• Dividend, Interest, and Rental Income — Taxed at the investor’s applicable slab rates under “Income from Other Sources” (or “Income from House Property” for direct rentals, with deductions like 30% standard deduction).
• Repayment of Capital/Return of Capital — Not taxed up to the original issue price or cost of acquisition. It reduces the unit’s cost basis for future capital gains. Excess amounts (after adjusting for prior distributions) are taxed as “Income from Other Sources” at slab rates, per the 2023 amendment (effective AY 2024-25).

For Non-Resident Investors:

• Dividend — Taxed at 10% (or lower under DTAA).
• Interest — Taxed at 5% (or lower under DTAA).
• Rental Income — Taxed at applicable rates, with possible deductions.
• Repayment of Capital — Similar to residents; excess taxed accordingly.
• Non-residents can claim DTAA benefits with required documentation.

TDS (Tax Deducted at Source):

• Deducted by the trust under Section 194LBA (no minimum threshold).
• Residents: 10% on dividend, interest, and rental.
• Non-residents: 10% on dividend; 5% on interest; applicable rates on rental.

Unit holders claim TDS credit in their Income Tax Returns (ITR).

Capital Gains on Sale of Units

Listed units of REITs and InvITs are treated similarly to equity securities.

• Short-Term Capital Gains (STCG): If held ≤12 months — Taxed at 20% (concessional rate under Section 111A, if STT paid).
• Long-Term Capital Gains (LTCG): If held >12 months — Taxed at 12.5% on gains exceeding ₹1.25 lakh (exemption threshold under Section 112A; no indexation).

These rates apply post-Budget 2024 changes. A key clarification from the Finance Bill 2025 amendment (effective AY 2026-27, from April 1, 2026) explicitly includes Section 112A in Section 115UA(2), confirming the concessional 12.5% LTCG rate (with ₹1.25 lakh exemption) for listed units, aligning them fully with equity shares.

Gains are calculated as sale price minus adjusted cost of acquisition (factoring in capital repayments).

Reporting in Income Tax Returns

• Pass-through income: Report in Schedule OS (Other Sources) or HP (House Property), under “Pass Through Income from Business Trust” in Schedule PTI.
• Exempt portions: In Schedule EI.
• Capital gains: In Schedule CG.
• Use Form 64B and Form 26AS for accurate filing (typically ITR-2 or ITR-3 for individuals).

Minor Differences Between REITs and InvITs

Taxation is identical under Section 115UA, but:

• REITs often distribute direct rental income (taxed as house property).
• InvITs may have more frequent capital repayments from project cash flows, potentially triggering the excess taxation rule more often.

Why This Matters for Investors

The pass-through structure avoids double taxation, making REITs and InvITs tax-efficient compared to direct real estate or infrastructure investments. However, effective yields depend on your tax slab, distribution mix, and holding period. Long-term investors benefit from concessional capital gains rates and the recent equity-like treatment for REITs.

Tax laws are subject to ongoing changes, so always verify the latest notifications or consult a tax professional for personalized advice. As India’s real estate and infrastructure sectors grow, these vehicles continue to offer attractive, regulated, and liquid investment avenues.

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