As with any investment, investors must understand the taxation framework governing REITs in India. The tax treatment of REITs can impact the returns and overall attractiveness of these investment instruments, making it essential for investors to grasp the intricacies of REIT taxation in the Indian context. Many investors even consult a tax planner to optimize their investment strategy and ensure compliance with applicable laws.
How are REITs Taxed at the Trust Level?
A Real Estate Investment Trust (REIT) is an entity that would be subject to corporate taxation if it did not hold a special REIT status. To qualify as a REIT, most of its assets and income must come from real estate. Moreover, it is required to distribute 90% of its taxable income to its shareholders. This stipulation usually results in REITs being exempt from corporate income taxes, although any earnings retained by the REIT would be subject to taxation at the corporate level.
How are REITs taxed at a Unitholder Level?
Interest income: If you earn money from owning shares in a real estate investment trust (REIT), taxation is based on how much you earn. It will be deducted automatically when you receive the money.
Dividend income: If the REIT’s company doesn’t pay a certain type of tax, the money you get from them as dividends is tax-free. But if they do pay that tax, then you will have to pay tax on the money you get. The tax will be deducted automatically when you receive the money.
Capital gains: If you make a profit by selling your REIT shares after holding them for a certain time, you will have to pay tax on that profit. If you held the shares for a long time and paid a certain tax when you bought them, the tax rate will be lower. But if you didn’t hold them for long or if they are not traded on a stock exchange, you will pay a higher tax rate on the profit you make.
Amortization of SPV debt: Amortization of SPV debt in REITs refers to the systematic reduction of debt obligations held by the REIT’s Special Purpose Vehicle (SPV) over time. Amortization of SPV debt involves making regular payments towards the debt’s principal and interest portions, gradually reducing the outstanding balance over the designated period. These payments are typically made from the rental income generated by the properties owned by the REIT. As the SPV debt is amortized, the REIT’s obligation decreases, reducing its overall debt burden. This is not taxable upon receipt, however such proceeds need to be reduced from the cost of acquisition of the units.
Summary
| Nature of Income | Taxation for REITs | Taxation for Unitholders |
|---|---|---|
| Dividend | Exempt | Exempt |
| Interest Income | Exempt | Taxable at applicable tax rates |
| Amortization of SPV debt | Exempt | Nil upon receipt |
| Capital gains on the sale of REIT units | N/A | Taxable |
FAQs
Are REITs tax-free in India?
Dividends earned through REITs are tax-free in India if the REIT distributes at least 90% of its taxable income to shareholders. However, if this condition is not met, the dividends are taxable according to the investor’s income tax bracket.
What is the 90 rule for REITs?
The 90 rule for REITs refers to the requirement that REITs must distribute at least 90% of their taxable income to shareholders to maintain their tax status as a pass-through entity and not pay federal income tax at the corporate level.
How do shareholders invest in REITs for tax savings?
Shareholders can invest in REITs for tax savings by taking advantage of the tax benefits of dividend income and capital gains tax rates. As mentioned, dividends earned through REITs are tax-free in India if the REIT distributes at least 90% of its taxable income to shareholders. Additionally, long-term capital gains (held for more than one year) are taxed at a lower rate than short-term capital gains, which can benefit investors who hold REITs for an extended period of time.
