Will REITs and InvITs have a negative impact from the latest tax proposal in this year's Budget?

This is how will REITs and InvITs be affected by the recent tax proposal in the Budget.

Will REITs and InvITs be affected

The Budget had many tax proposals this year, which will impact investment securities used widely by the rich massively. One such proposal is to tax the income proportion of distributed income by Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs). The Finance Minister proposed the taxing at income tax's marginal rate and the repayment of any capital that arises from the distribution from April 1, 2023. 

Read: Should you have InvITs in your portfolio? All you need to know.

Background and Future

Usually, the total income from these trusts is given as debt repayment, rental income, dividend, or interest. Repayment debts were not being taxed till now, and the proposal looks to tax it under "income from other sources." There is a loophole here. Let's understand. Any InvIT or REIT has multiple stakeholders. These are SPVs, the trust, and the investors. The investments are made through these. Investors purchase a trust's units, and this trust usually invests the money by lending through SPVs. Income from this SPV transfers to the trust as interest or dividend. There is debt repayment as the trust funds SPVs as a loan. The trust must shell out 90% of its income and gives it to its unit holders. The debt repayment or capital the unit holder received was not taxable until now. 

Experts suggest the taxing of debt capital is misaligned. The remaining alternative would have been to allow the reduction of its value from the units' original cost as the repayments occurred. For InvIT and REIT investors, the yield will be lower and the tax higher. It might disrupt the potential return in the long-term in these investments. 

The Numbers Talk

Looking at the numbers, let us see how InvITs and REITs will be affected. Many listed trusts don't distribute income under the debt repayment or capital categories. Distribution details show that three of the 6 trusts have a significant repayment of capital portion, and the remaining don't. These will impact the yield difference most when the taxes come into play. For others, it won't have a significant impact. 

Read: You should know this about the real estate industry in India.


Hexagon Wealth Managing Director & Principal Advisor Srikanth Bhagavat believes that the additional tax impact has been sharp after the Budget announcement's price correction. Existing investors invested in the asset's fundamental diversification need not switch and can accumulate at reduced prices. 

What are REITs and InvIts? 

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.




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