Investment Trusts (REITs) and its Taxation

Introduction

Today, investment has become an important part of financial planning of many people. Real estate is considered a strong asset class, but buying property directly is not possible for everyone. Therefore, REITs are a good alternative that gives investors a chance to invest in this sector.
If you are planning to invest through this or have already invested, then you must understand how this income is generated and how tax is levied on it.

What are REITs?

REITs are investment funds that invest in real estate assets. These companies invest in real estate properties (such as commercial buildings, malls, hotels, warehouses, etc.) and generate rental income from them. This rental income is distributed among the investors.
In India, REITs are regulated by the Securities and Exchange Board of India (SEBI). Earlier, only large investors could invest in real estate, but after the advent of REITs, retail investors can also become a part of the real estate sector. Sources of Income from REITs

REITs have majorly 3 sources of income

Dividend Income

REITs give many properties on rent and a large part of the rental income is given to investors as dividend.

Interest Income

Some REITs also provide loans for the development of their properties or projects. The interest earned on these loans is also a part of the income of REITs.

Capital Gains

When REITs sell a property and make a profit from it, it is called capital gains income. If you are an investor and you have sold shares of REITs, then the profit from it will also be called capital gain.

Taxation Rules on REITs

The taxation of REITs in India is quite structured. It mainly impacts investors in 3 ways:

Taxation on Dividend Income

If the dividend of REITs is coming from a tax-free source, then it will be tax-free for the investors as well. But if it is coming from a taxable source, then the investors will have to pay tax as per the slab rate.
To make this clear, REITs declare before distributing dividend to their investors whether it is taxable or not.

Taxation on Interest Income

Whatever interest investors get from REITs, TDS (Tax Deducted at Source) is 10% on it, if your PAN card is registered. This income is taxable as per the slab rate of the investor.

Taxation on Capital Gains

If the investor sells units of REITs and makes profit from it, then capital gains tax is levied on it.

Short-Term Capital Gains (STCG): If you have held units of REITs for a duration less than 3 years and sold them, then you will have to pay 15% STCG tax.
Long-Term Capital Gains (LTCG): If you hold units of REITs for 3 years or more, profit up to Rs 1 lakh will be tax-free. Gains above that will be taxed at 10% LTCG tax.

TDS Rules on REITs Income

>> 10% TDS will be deducted on interest income if the investor’s PAN is available.
>> TDS will be levied even if dividend comes from a taxable source.
>> TDS is not levied on capital gains, but you will have to show capital gains while filing tax return.

Understand Taxation of REITs with an example

Suppose, you invested ₹5 lakh in a REIT. In a year you got this income:

Dividend: ₹30,000 (from non-taxable source) – No tax will be levied on this.
Interest Income: ₹20,000 – 10% TDS will be deducted on this, i.e. ₹2,000 will be deducted already. You will get the remaining ₹18,000 and it will be added to your total income.
Capital Gains: If you sell a profit of ₹50,000 – If it is short-term then 15% tax, i.e. ₹7,500 will be levied. If it is long-term and less than ₹1 lakh, it will be tax-free.

Tax Benefits of REITs

Dividend income of REITs can be tax-free if it comes from a non-taxable source.
Profit of up to ₹1 lakh of long-term capital gains is tax-free.
There is no need to pay direct tax on rental income as REITs distribute it.
But if you are in a higher tax bracket, you will have to pay tax on interest and taxable dividend.

Conclusion

REITs are a good investment option for those who want to invest in real estate without buying property directly. They provide regular income and diversification. But, it is important to understand the taxation of REITs so that you can manage your tax liabilities properly.
If you are planning to invest in REITs, it is a smart decision to understand your tax obligations and consult a financial advisor. This will enable you to invest tax-efficiently and achieve your financial goals.

Income From Real Estate Investment Trusts (REITs) and its Taxation