REIT and InvIT Taxation: The Distribution That Isn't Always Tax-Free

A client showed me his bank statement last month. Four credits from two REITs and an InvIT, and he had put all of them under "dividend, exempt" in his draft. Roughly a third of that money was interest, taxable at 30%. Another slice was a return of his own capital, which he had not treated as income, correctly, but had also not deducted from the cost of his units. That was going to overstate his loss when he eventually sold.

Nobody was trying to hide anything. The bank narration just says "REIT distribution", and the law cares about what sits underneath.

# Why one payout is four incomes

A REIT or InvIT is a business trust. It holds its assets mostly through special purpose vehicles (SPVs), which are companies that own the office park or the toll road. Cash moves up from the SPV to the trust, and then from the trust to you, in several legal forms:

• Interest on loans the trust has given to the SPV
• Dividend declared by the SPV
• Rent, where a REIT owns property directly rather than through an SPV
• Repayment of debt (sometimes called capital repayment or return of capital), where the SPV pays back the loan principal
• Other income, such as interest the trust earns on its own treasury deposits

Section 223 of the Income-tax Act, 2025 (old Section 115UA) says that income distributed by the trust keeps the same nature, and the same proportion, in your hands as it had when the trust received it. That is the pass-through rule. So the trust's interest is your interest, and its dividend is your dividend.

Schedule V of the new Act (which carries what used to be Section 10(23FC), 10(23FCA) and 10(23FD)) then decides what is exempt at each level.

# The component table for Tax Year 2026-27

Tax Year 2026-27 means FY 2026-27, the return you file in 2027, which people still call AY 2027-28. For FY 2025-26, the return filed in 2026, the older rules in the next section apply.

# The dividend: what changed in August 2026

Until 31 March 2026 the dividend component had a condition attached. If the SPV had opted for the concessional 22% corporate tax regime (old Section 115BAA, now Section 200), the dividend it paid lost its exemption in the unit holder's hands. If the SPV stayed on the regular regime, the dividend was exempt.

So two REITs could pay the same "dividend" per unit, and one would be taxable and the other exempt. It depended on a choice made inside a company that most unit holders had never heard of. Many large SPVs had moved to the concessional regime, so in practice a lot of REIT and InvIT dividends were taxable.

The Taxation and Other Laws (Amendment) Act, 2026 received the President's assent on 17 August 2026. Among other things, it removes that condition from the Schedule V entry for unit holders, with effect from 1 April 2026. From Tax Year 2026-27 the dividend component is exempt either way.

The catch is at the SPV level. The same Act raises the surcharge on SPVs of business trusts that opt for the concessional regime from 10% to 25%. The SPV pays more tax, so a little less cash may be left to distribute. You do not pay that tax directly, but it affects the yield.

# Repayment of debt: tax-free now, but not for ever

This is the component people misunderstand most, and it has changed the most since 2023.

Before Finance Act 2023, repayment of debt was simply not income in the unit holder's hands. Nobody taxed it anywhere. Finance Act 2023 added old Section 56(2)(xii), now Section 92(2)(k) of the 2025 Act. It works on a running total:

Taxable amount = A − B − C (treated as nil if B + C is more than A)

• A = all such distributions received on the unit so far, this year and earlier years, other than the exempt interest, dividend and rent components and amounts taxed at trust level
• B = the price at which the trust originally issued the unit
• C = amounts already taxed under this clause in earlier years

In plain terms, you get your capital back tax-free until the total repaid on a unit reaches its issue price. Anything beyond that is income from other sources, taxed at slab.

The second half is the part that gets missed. Section 72(4)(a) (old Explanation 1 to Section 48) reduces the cost of acquisition of your units by the repayment amounts that were not taxed. So the tax is postponed, not waived. It comes back as a larger capital gain, or a smaller capital loss, when you sell.

# Worked example: a ₹1 lakh distribution at the 30% slab

Assumptions, all illustrative: a resident individual in the 30% slab under the new regime, surcharge ignored, cess at 4%. They hold 4,000 units of a REIT bought at ₹350, a cost of ₹14,00,000. Over Tax Year 2026-27 the REIT distributes ₹25 per unit, ₹1,00,000 in all, and the distribution notices split it like this:

After tax, ₹87,520 of the ₹1,00,000 stays with you.

Two comparisons show why the breakup matters:

• Under the pre-amendment rule, if the SPV had opted for the concessional regime, the ₹40,000 dividend would also have been taxable. Taxable income would have been ₹80,000 and the tax ₹24,960, double the figure above.
• TDS at 10% on the interest and rent comes to ₹4,000. Your actual tax on those components is ₹12,480, so about ₹8,480 still has to be paid through advance tax or self-assessment tax. TDS on this income is a floor, not the full tax.

Now the cost side. The ₹20,000 repayment brings the cost of the 4,000 units down from ₹14,00,000 to ₹13,80,000, or ₹345 a unit. Suppose you sell all of them 15 months after purchase at ₹380 on the exchange:

If you forget the cost reduction and use ₹14,00,000, your gain shows as ₹1,20,000 instead of ₹1,40,000. On an assessment that difference is easy for the department to find, because the trust reports every repayment.

# TDS: what gets deducted, and the one mismatch to watch

The trust deducts TDS under Section 393 of the 2025 Act (old Section 194LBA) before paying you. For a resident unit holder with PAN, the rate on the interest and dividend components is 10%, with no threshold. Rent from a REIT's directly held assets also suffers TDS. Without PAN, the rate goes up.

One wrinkle is worth knowing about. A professional commentary on the 2026 amendment points out that the no-deduction condition in the TDS provision still refers to an SPV not having opted for Section 200, even though the exemption itself no longer depends on that. If that reading is right, some trusts may keep deducting TDS on a dividend component that is now exempt for you.

If that happens, the fix is on your side:

1. Show the dividend as exempt income in your return.
2. Claim the full TDS as credit. It will be refunded or set against tax on your other income.
3. Match the trust's annual statement of distributed income against your AIS before you file. Our AIS and Form 26AS reconciliation guide walks through it.

# Selling units: capital gains

Listed REIT and InvIT units are treated much like listed equity when you sell them on an exchange with STT:

The 12-month period for listed business trust units applies from 23 July 2024. Before that it was 36 months, which is why older articles still give the longer figure. The ₹1.25 lakh exemption is one pool shared with your listed equity shares and equity mutual funds. It is not a separate allowance for REITs. The general framework is in our STCG and LTCG explainer.

A few practical points from filing these returns:

• Use the adjusted cost. Every repayment-of-debt amount you received on a lot comes off that lot's cost before you compute the gain.
• Losses behave like equity losses. A short-term capital loss can be set off against both short-term and long-term gains. A long-term loss can be set off only against long-term gains.
• Units bought just before a record date and sold soon after can run into the dividend-stripping rule, especially now that the dividend component is exempt. That is covered in our companion piece on bonus and dividend stripping.
• Capital gains on REIT units go in the capital gains schedule, which means ITR-2 or ITR-3 rather than ITR-1. See how to file ITR-2 with capital gains.

# What to do before your next return

1. Download each distribution notice for the year from the trust's investor page and note the per-unit split.
2. Separate the taxable parts (interest, REIT rent) from the exempt dividend and from repayment of debt.
3. Keep a running total of repayments per lot. It lowers your cost now and decides when Section 92(2)(k) starts to apply.
4. Match TDS and components against AIS before filing, not after an intimation arrives.
5. For FY 2025-26, check whether any dividend came from an SPV on the concessional regime. Under the law for that year it was taxable.

If you are still getting used to the new section numbers, keep our old vs new section mapping cheat sheet open next to you, and check any number you rely on against the Act itself.

Know which part of every payout is actually taxable. Track REIT and InvIT lots with adjusted cost in the Capital Gains Tracker, and ask ARTHA when a distribution notice is unclear. Start free →

# References (verified 23 September 2026)

1. Income Tax Department: Section 196, Income-tax Act, 2025. https://www.incometaxindia.gov.in/w/section-196-76
2. Income Tax Department: Section 72, Income-tax Act, 2025 (cost adjustment for business trust units). https://www.incometaxindia.gov.in/w/section-72-127
3. Income Tax Department: Section 48, Income-tax Act, 1961. https://www.incometaxindia.gov.in/w/section-48-61
4. Income Tax Department: Guidance note on Form 76, income distributed by business trusts. https://www.incometaxindia.gov.in/documents/d/guest/comprehensive-note-on-form-76
5. PIB: CBDT FAQs on the capital gains changes in Union Budget 2024-25 (12-month holding period for listed business trust units). https://www.pib.gov.in/PressReleasePage.aspx?PRID=2036604&reg=48&lang=2
6. PRS Legislative Research: The Taxation and Other Laws (Amendment) Bill, 2026. https://prsindia.org/billtrack/the-taxation-and-other-laws-amendment-bill-2026
7. Business Standard: Taxation, Payment and Settlement Systems amendments get President's nod (17 August 2026). https://www.business-standard.com/finance/news/taxation-payment-and-settlement-systems-amendment-get-president-s-nod-126081800721_1.html
8. Business Standard: REIT, InvIT dividend tax break, what changes and the catch. https://www.business-standard.com/finance/personal-finance/reit-invit-dividend-tax-break-experts-explain-what-changes-and-the-catch-126080701364_1.html
9. EZTax: Income-tax Act, 2025, Section 223, Section 92 and Schedule V text. https://eztax.in/income-tax-act-2025/section-223
10. casahuja.com: REIT and InvIT taxation in 2026 (effective date and TDS wording issue). https://www.casahuja.com/2026/08/reit-invit-taxation-in-2026-spvs-tax.html
11. TaxTMI: Section 198 (old 112A) comparison note. https://www.taxtmi.com/tmi_notes?id=1655

Disclaimer: This article is educational and general in nature. It is based on the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026, and on the 1961 Act for earlier years. It does not recommend any REIT, InvIT or other security. VittSphere ONE is not a SEBI-registered Investment Adviser or Research Analyst. The worked example uses illustrative figures and assumptions, not any trust's actual distribution, and ignores surcharge. The component split of any real distribution must be taken from the trust's own notice and tax statement. Confirm your specific position with a Chartered Accountant before filing. Data verified 23 September 2026.

Written by

Prabhakar Kumar

Chartered Accountant (ICAI, Nov 2019)

Chartered Accountant (FCA, ICAI) and founder of VittSphere Technologies. Writes on Indian taxation, capital gains, GST and personal finance.