Taxation of REITs and InvITs from 1st April 2024
Beginning April 1, 2024, investors in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) will have to pay more tax. The government had proposed taxing the revenue that business trusts like InvITs distribute to unitholders in the form of debt repayment.
REITs distribute surplus amounts to unit holders periodically usually every quarter. These payouts are under different heads like Interest, Dividend, Rental Income and Repayment of Debt. Earlier only interest, dividend and rental income were taxable. The payout under repayment of Debt was exempt from taxes.
Initially the Budget proposed to tax all payouts, irrespective of the head. However the final Finance Bill 2023 had included some relaxations.
"X" bought a REIT for Rs 400 in Jan 2023 which was originally issued at Rs 350 in 2018. Lets assume the REIT pays Rs 50 every year as debt repayment. The issue price of a REIT is important for this calculation. Now irrespective of the price paid in the secondary market, we consider the issue price of Rs 350. All payouts in the form of debt repayment till Rs 350 will remain free according to the new amendment. The payouts till 2024 will add up to Rs 350 and from 2025 Rs 50 would become taxable.
Tax will be applicable according to the individual slab rates.
This means that investor would require information about yearly payouts from the year of issue. The issuing company would have to update the unit holders about this.
There is also a change in capital gains calculation for REITs. The repayment of debt will be reduced from the cost of purchase to arrive at cost of acquisition for calculation of Capital Gains. In our example the cost of purchase was 400. Let assume it was sold in 2025 for Rs 420. The repayment of debt in 2024 and 2025 would add up to Rs 100, so the cost of acquisition in 2025 will be Rs 300 and capital gains would be Rs 120 ( 420-300)
REITs are taxable as long term assets after a holding period of 36 months. Applicable rate is 10% for gains beyond 1 lakh.
The 3 REITs listed in India are Embassy REIT, Mindspace REIT and Brookfield India REIT. Given the current payouts of REITs it may take 12-15 years for the payouts to exceed issue price.