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Budget 2023: Investors In REITs, InvITs Face A New Tax

Budget 2023 does away with a tax loophole that unitholders of REITs and InvITs benefited from.

<div class="paragraphs"><p>(Photo: Jason Dent/Unsplash)</p></div>
(Photo: Jason Dent/Unsplash)

Investors in the real estate and infrastructure investment trusts will have to cough up more tax starting April 1, 2024.

The Finance Bill, 2023, proposes an amendment to plug a double non-taxation event that exists in the current provisions applicable to REITs and InVITs. Both instruments have a pass-through status. Any income distributed to unit holders will be of the same nature as income held by the REIT or InvIT.

Typically, REITs or InvIT make four kinds of payments to their unit holders:

  • Interest

  • Dividend

  • Rental income

  • Repayment of debt

Currently, the first three are taxed in the hands of the unitholders or investors at the applicable income tax slab .

However, when payments are made under the category of repayment of debt, that amount is currently not taxed either at the REIT or InvIT or unitholder level.

But what is this 'repayment of debt?'

Ajay Rotti, partner at Dhruva Advisors, said that REITs and InvITs extend loans to their subsidiaries. The subsidiary, during a year, will repay this loan with interest. For the REIT or InvIT, this is surplus cash that has to be distributed to the investors.

Typically, it gets categorised as repayment of a loan, which was being treated as non-taxable by all the players in the market, Rotti added.

This will impact all retail investors, foreign institutional investors, and high-net-worth individuals. The law says, in the hands of the unitholder, the income will have the same character as the REIT or InvIT. So, it's a repayment in the hands of the structure, which gets categorised as such in the hands of the investor.
Ajay Rotti, Partner, Dhruva Advisors

The dual non-taxation of any distribution made by the business trust, which exists today, is not the intent of the special taxation regime applicable to such structures, as explained in the memorandum to the Finance Bill, 2023.