Investors in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) may soon see a significant tax relief on their dividend distributions. The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on August 6, proposes to extend dividend exemption to unit holders, regardless of the underlying Special Purpose Vehicle (SPV) opting for the new concessional tax regime.
Understanding the Proposed Tax Changes
Currently, the dividend component of a REIT or InvIT distribution is exempt only if the underlying SPV is taxed under the old corporate tax regime. If the SPV chooses the new, often more favorable, tax regime, dividends can become taxable in the hands of investors at their applicable slab rates.
The proposed amendment aims to remove this condition, ensuring that dividends received by unit holders remain exempt irrespective of the SPV's chosen tax regime. This change could particularly benefit investors in higher tax brackets. For instance, CA Parag Jain of 1 Finance notes that an investor in the 30% bracket currently paying approximately ₹23,400 on a ₹75,000 dividend from an SPV using the new regime would see that tax liability fall to nil if the amendment becomes law.
The proposal also addresses a structural issue, as investors typically have no control over the tax regime selected by an SPV, despite its impact on their distributions.
What Components Remain Taxable?
It is crucial to understand that the proposed exemption does not make an entire REIT or InvIT distribution tax-free. Distributions often comprise multiple components, each with distinct tax treatments:
- Dividend: Only the dividend component from an SPV opting for the new tax regime would gain the additional exemption.
- Interest Income: This will continue to be taxable at the investor's applicable slab rate.
- Rental Income: This will retain its existing tax treatment.
- Capital Gains: Gains arising from the sale of REIT or InvIT units will remain taxable under applicable capital gains rules.
For example, if an investor receives a total distribution of ₹1 lakh, consisting of ₹60,000 in interest and ₹40,000 in dividend, the proposed exemption would apply only to the ₹40,000 dividend. The ₹60,000 interest component would still be taxed.
Impact on SPV Efficiency and MAT Credits
Beyond individual investors, the proposed changes also address structural issues at the SPV level, particularly concerning Minimum Alternate Tax (MAT) credits. Rajesh Deo, CFO of Nexus Select Malls, highlights that allowing REIT SPVs to evaluate and opt for a concessional tax regime, coupled with the utilization of accumulated MAT credits, could significantly improve cash-flow efficiency at the asset level.
Deo states, "The provision around MAT credits is particularly meaningful. In our case, the MAT credit of a significant amount as of March 2026 represents a tangible balance-sheet asset, and the proposed framework could enable a more efficient utilisation of such credits."
For REITs, better utilization of these credits could potentially free up capital for reinvestment, deleveraging, asset enhancement, or increased distributions to unitholders, thereby improving overall efficiency.
TDS and Investor Considerations
Investors must also factor in Tax Deducted at Source (TDS). TDS is typically deducted on both interest and dividend components for resident unit holders. Even if the dividend becomes exempt, TDS deduction does not automatically disappear. Investors can claim the deducted amount as a tax credit when filing their income tax returns and seek a refund if the deduction exceeds their final tax liability.
Before making investment decisions, CA Parag Jain advises investors to review the breakup of REIT and InvIT distributions, including notices issued by the trusts, and examine payout patterns over the previous two to three years. While the proposed amendment could improve post-tax returns and provide greater certainty, especially for high-bracket investors, presidential assent is still required before the dividend exemption becomes law.