REIT, InvIT dividend tax break: Experts explain what changes and the catch

Legal amendment could make REIT and InvIT dividend income tax-free, but experts flag a higher SPV-level tax and key caveats

REIT and InvIT investors stand to get significant tax relief after Lok Sabha amended taxation laws. However, the benefit is not as broad as “all REIT/InvIT income will become tax-free”.

 

The Taxation and Other Laws (Amendment) Bill, 2026 proposes to exempt the dividend component of distributions from Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) even when their underlying special purpose vehicles (SPVs) opt for the concessional corporate tax regime.

 

The Bill is yet to clear the Rajya Sabha and receive Presidential assent.

 

What is changing?

 

REITs and InvITs operate through a pass-through structure, under which different types of income generated by underlying assets can flow through to investors.

 

 

Parag Jain, a chartered accountant and tax head of 1 Finance, a Sebi-registered investment advisory, said distributions can have up to four components,  interest, dividend, rental income and capital gains, and the proposed amendment specifically concerns the dividend component.

 

Under the existing rules, dividend distributed by an SPV is exempt in the hands of REIT/InvIT unitholders when the SPV follows the old corporate tax regime. However, if the SPV opts for the concessional tax regime, the dividend exemption is lost and the investor may have to pay tax at their applicable slab rate.

 

“The investors had no control over an SPV's regime choice but bore the full tax consequence of it,” Jain said. The proposed amendment seeks to remove this condition.

 

In simple terms, the tax treatment of the dividend would no longer depend on whether the underlying SPV chooses the old or new corporate tax regime.

 

What could it mean for your tax bill?

 

Consider a salaried investor, Shraddha, who falls in the 30 per cent tax bracket and receives Rs 75,000 as eligible dividend income from a REIT.

 

Jain said that under the current rules, if the underlying SPV has opted for the new corporate tax regime, the tax on this Rs 75,000 would be about Rs 23,400, including cess. If the proposed amendment becomes law, the entire Rs 75,000 dividend would be exempt, reducing the tax on that component to nil.

 

For an investor receiving Rs 50,000, Jain estimates the saving at about Rs 10,400 at the 20 per cent slab and Rs 15,600 at the 30 per cent slab.

 

Sheersham Gupta, director of Rupeezy, an online discount stock broker and trading platform, said that if an investor receives Rs 1 lakh of eligible dividend and falls in the 30 per cent tax bracket, the proposed exemption could substantially increase the amount retained after tax.

However, Gupta cautioned that investors should not assume that the entire REIT or InvIT payout is dividend income.

 

Your entire REIT payout will not become tax-free

 

This is the most important distinction for investors.

 

Jain said interest income remains taxable at slab rates. TDS at 10 per cent is also deducted on both interest and dividend components for resident unitholders.

 

For example, if an investor receives Rs 1 lakh in total distributions, of which Rs 60,000 is interest and Rs 40,000 is dividend, the proposed exemption would apply only to the Rs 40,000 dividend component.

 

“Treating the entire distribution as tax-free in the ITR produces an incorrect return,” Jain said.

 

Gupta also stressed that investors should check the tax breakup provided for each distribution instead of treating every rupee received from a REIT or InvIT as tax-free.

 

The trade-off: higher tax at the SPV level

 

There is another side to the proposal. The Bill proposes increasing the surcharge on SPVs opting for the concessional corporate tax regime from 10 per cent to 25 per cent.

 

Harsh Shah, managing director of IndiGrid, an Indian power sector infrastructure investment trust, said this would raise the effective tax rate for such SPVs from about 25.17 per cent to 28.60 per cent. The higher tax would mean greater cash outflow at the asset-holding company level.

 

Since distributions ultimately depend on the cash generated after taxes, Shah said the additional tax burden could put pressure on the cash available for distribution.

Chintak Shah, vice-president at Anand Rathi Wealth, explained the trade-off through a Rs 100 pre-tax profit example. Under the existing structure, an SPV paying about Rs 25.17 in tax would have Rs 74.83 left for distribution. If a high-tax-bracket investor then paid tax on the dividend, the post-tax amount could fall to about Rs 47.98.

 

Under the proposed structure, the SPV's tax could rise to about Rs 28.60, leaving Rs 71.40. But if that dividend becomes exempt for the investor, the unitholder could retain the entire Rs 71.40.

 

This means the proposal could particularly benefit investors in higher tax brackets, even though the SPV pays more tax.

 

Who may benefit the most?

 

Sandeep Jain, chief financial officer of NDR InvIT Trust, an infrastructure investment trust, said the proposed exemption could improve post-tax returns and make InvITs more attractive to retail investors by providing greater tax clarity.

However, Parag Jain pointed out that the benefit may be limited for investors in the zero or 5 per cent tax brackets because their tax liability on dividends was already low.

 

Similarly, investors primarily looking for capital gains should not expect a major change from this amendment. Jain said the proposed change relates to dividends, while the taxation of short-term and long-term capital gains on REIT and InvIT units remains unchanged.

 

The proposal, therefore, is best viewed as a tax relief on one component of REIT/InvIT distributions, rather than a blanket tax exemption.

 

As Sheersham Gupta put it, investors need to look at the “details” of each distribution before calculating the actual benefit.