India’s recent changes to tax rules for REITs and InvITs could enhance payout predictability for investors. However, increased surcharges on special purpose vehicles may pose new financial hurdles and influence market dynamics.
India’s planned tax overhaul for real estate investment trusts and infrastructure investment trusts could make payouts more predictable for investors, but the gain may be partly offset by a sharper tax burden on the special purpose vehicles that sit underneath the structures.
The Lok Sabha has passed a taxation bill that would let REIT and InvIT special purpose vehicles choose the concessional corporate tax regime without making the dividend element of distributions taxable in the hands of unitholders. That change is designed to remove a long-running structuring irritation and could support fundraising and new launches in the sector, according to tax advisers.
But the relief comes with a trade-off. Experts told The Hindu BusinessLine that the surcharge on companies using the concessional regime would rise to 25 per cent from 10 per cent, making the system more expensive in some cases. Kunal Savani of Cyril Amarchand Mangaldas said the restored dividend exemption reduces uncertainty for unitholders, but sponsors still need to weigh the economics carefully, especially as minimum alternate tax, or MAT, becomes a final non-creditable tax from FY27.
The effect on cash flows will not be identical across the market. Rahul Jain of Nuvama Wealth said distribution per unit could dip slightly in the short term if more SPVs switch regimes because of the higher surcharge. Over time, however, he said, stronger tax efficiency, the possible use of accumulated MAT credits and greater capital inflows should help support distributions.
Others argued the surcharge could blunt some of the benefit, even if the new framework still looks better on paper. Pallav Pradyumn Narang of CNK said the government should consider cutting back the additional levy, while Ankit Jain of Ved Jain and Associates said the lower effective tax rate could still encourage a phased migration, especially among mature SPVs with stranded MAT credits.
The wider context is important. India has been adjusting the tax treatment of business trusts for years: earlier reforms sought to widen the tax base by taxing certain distributions at the unitholder level, and the regime has gradually moved away from the original model of near-total pass-through. The latest proposal, according to Preeti Chheda of Mindspace REIT and the Indian REITs Association, preserves the tax treatment of distributions to unitholders while giving REITs access to the new corporate regime, a combination she said is central to keeping the structure attractive.
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