Tax complexity reshapes the value proposition of REITs versus fixed deposits and equities

As tax treatment becomes more nuanced, investors must carefully analyse the after-tax returns of fixed deposits, REITs, and equities, with recent proposals potentially enhancing REIT payout efficiency and altering investment strategies.

Tax can make a far bigger difference than the headline yield when investors compare fixed deposits, REITs and equities, particularly for those in higher income brackets. Fixed deposit interest is taxed as ordinary income, listed equity gains can qualify for concessional rates and REIT payouts can contain several components, each with its own treatment.

That complexity matters because a REIT distribution is not a single stream of income. According to Business Standard’s report, the payout can include interest, dividend, rental income and return of capital, and investors need the distribution statement to see how each part is classified. Tax expert Chandni Anandan told ClearTax that unitholders should rely on that statement rather than assuming the whole amount is taxed in the same way.

The government is also proposing a change that could improve some REIT payouts. The Taxation and Other Laws (Amendment) Bill, 2026, passed by Lok Sabha, would exempt the dividend element of distributions from REITs and infrastructure investment trusts even when the underlying special purpose vehicle has opted for the concessional corporate tax regime. But the proposal does not make all REIT income tax-free, and interest or other taxable components would still need to be reported separately. The Bill still requires approval in Rajya Sabha and presidential assent before it becomes law.

Fixed deposits remain the simplest product from a tax standpoint, but not necessarily the most efficient. Interest is taxed at the investor’s slab rate, so a 7% deposit can translate into a materially lower post-tax return for someone in a 30% bracket. Tax deducted at source is only an advance payment, not the final liability, and there is no capital gains benefit simply because the money has stayed in the deposit for a long time.

Equities, by contrast, generally receive more favourable treatment on gains. Listed shares held for up to 12 months are treated as short-term capital assets, while holdings beyond that period can qualify as long-term, with gains above the annual Rs 1.25 lakh threshold taxed at 12.5% under Section 112A, subject to the usual conditions. Business trust units, including REIT units, also follow a 12-month holding period for long-term status. Dividends from ordinary companies are still taxed at slab rates, so the tax outcome depends on whether the investor is earning income, booking gains or both.

For investors, the practical lesson is to compare post-tax returns rather than advertised yields. The Financial Express and Mint have both noted that REITs can be more tax efficient than many investors expect, but the benefit depends on the component mix, the holding period and the investor’s bracket. Before filing a return, taxpayers should reconcile bank interest certificates, broker statements and REIT distribution details with the annual information statement and Form 26AS, then report each item under the correct schedule.