The proposed system does not aim to apply the low tax rates to dividends for debt repayment.
In Budget 2023, the Finance Minister proposed taxing REIT and InvIT dividends that unitholders classify as “repayment of loans” (or “return of capital”) as “other income.” Gains from REITs and Invits will be subject to a significant rise in tax as a result of this plan.
According to experts, the new regulations would increase investors’ taxes by 60 to 150 basis points, which would lower their rate of return by 0.6 to 1%. Investors may be put off from investing in Reits and Invits by the decline in returns.
How is income from REIT and INvit investments taxed?
Both Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) are investment entities that resemble mutual funds. The difference is in the underlying asset: whereas InvITs possess infrastructure/under-construction assets, REITs own real estate.
“When distributed to its investors, an interest payment received by a REIT is counted as interest income. Many foreign investors do not have to pay tax on loan repayments since they are not regarded as income. If they treat it as income, as the budget proposes, their current zero percent tax rate won’t apply to this kind of revenue. According to Sudarshan Lodha, co-founder and CEO of Strata Property Management, foreign investors would no longer qualify for the capital gains tax treatment and will now be required to pay tax on these revenues.
Tax regulations for REITs, Invits, and Fractional Ownership
| Avenues | Tax | Returns (Avg) | Lock-in period |
| REITS | LTCG @ 10% (after 36 months above 1 Lac), STCG @ 15%, and a new marginal rate of interest tax on loan repayments (likely to increase by 150 basis points) | 6 – 8% | Minimum 1 year |
| InvITs | LTCG @ 10% (after 36 months above 1 Lac), STCG @ 15%, and a new marginal rate of interest tax on loan repayments (likely to increase by 150 basis points) | 7-10% | Maximum 3 years |
| Fractional Ownership | STCG at 15% and LTCG at 10% (after 36 months above 1 Lac) | 8-12% + capital appreciation during the exit | Minimum 3 Years |
How will the fresh modifications affect investors?
According to Lodha, investment firms will need to change the method they make such distributions in the future because debt repayment might be subject to the highest tax rate.
“Certain types of dividend and interest income receive a tax advantage under the current tax code. Since the proposed regime does not aim to apply the reduced tax rates to debt repayment distributions, foreign investors could face tax rates as high as 40%. Even while these investors might be able to rely on tax treaties, only a select number may offer tax exemption on such payouts, he continues.
According to Lodha, the envisioned tax reforms may encourage more investors to purchase fractional interests in real estate.
“Fractional ownership allows investors entire control on their investment, in contrast to REITs, which have a model similar to mutual funds and offer less control over one’s investment. The tax burden on investments in REITs and INVs has increased as a result of recent tax changes, decreasing the asset class’s appeal to investors. Due of this, frustrated investors may turn to fractional investments. Additionally, the expansion of this asset class is anticipated to be aided by the positive prognosis for the CRE industry and India’s rise as a major manufacturing and IT hub, according to him.
