My REIT or InvIT has paid me interest, dividend, rent and something called repayment of debt. How is each taxed?
s.115UA makes the trust a conduit for the income streams the Act names: interest and dividend from the SPV, and rent from property a REIT holds directly, are exempt in the trust's hands and taxed in yours as if you had earned them, with TDS under s.194LBA. Anything else the trust distributes is exempt in your hands under s.10(23FD), and the trust's own residual income is taxed at the maximum marginal rate. The fourth component, repayment of debt, was untaxed at both levels until the Finance Act 2023: it is now taxed under s.56(2)(xii), but only once cumulative distributions on the unit exceed the price at which it was issued.
A business trust is a REIT or an InvIT registered under the SEBI regulations, and the Act defines it in s.2(13A). The design is a pass-through, but a partial one: it passes through the streams the Act names and taxes everything else at the trust level.
The pass-through rule is in s.115UA(1): "Any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust." So interest stays interest and rent stays rent; the trust is not a taxpayer standing between the unit holder and the income. s.115UA(3) carries that into charge, deeming the distributed income "of the nature as referred to in clause (23FC) or clause (23FCA) of section 10" to be income of the unit holder in the year of distribution.
The two exemptions that make it work sit in s.10. s.10(23FC) exempts, in the trust's hands, interest received from the special purpose vehicle and dividend received from it. s.10(23FCA) exempts, in the trust's hands, income of a REIT by way of renting or leasing real estate assets it owns directly. Those exempt receipts are then taxed in the unit holder's hands under s.115UA(3) — the exemption is at the trust level only.
What is left at the trust level is taxed there. s.115UA(2) provides that "total income of a business trust shall be charged to tax at the maximum marginal rate", subject to the special rates in ss.111A, 112 and 112A for capital gains. The practical consequence is that capital gains realised by the trust — on the sale of SPV shares or of directly held real estate — do not pass through; they are taxed in the trust's hands.
TDS is in s.194LBA. On distribution to a resident unit holder the trust must "deduct income-tax thereon at the rate of ten per cent". On distribution to a non-resident or foreign company of income of the nature in s.10(23FC), the rate is "five per cent in case of income of the nature referred to in sub-clause (a)" — the interest — "and ten per cent in case of income of the nature referred to in sub-clause (b)" — the dividend. On distribution to a non-resident of rental income under s.10(23FCA), tax is deducted "at the rates in force". s.115UA(4) requires the payer to "furnish a statement to the unit holder and the prescribed authority, within such time and in such form and manner as may be prescribed", which is the statement the unit holder should reconcile against before filing.
The dividend leg has a wrinkle. On the commentary fetched, dividend distributed by the trust is exempt in the unit holder's hands under s.10(23FD) where the SPV has not opted for the concessional corporate rate regime, and taxable where the SPV has opted for it. Check the SPV's regime before treating a dividend component as exempt.
That leaves the component that changed. REITs and InvITs typically lend to their SPVs and then return capital to unit holders as repayment of that debt. That distribution is not income of the nature in s.10(23FC) or s.10(23FCA) and is not chargeable under s.115UA(2), so until assessment year 2023-24 it escaped tax at both levels. The Finance Act 2023 closed that, and the enacted rule is materially softer than the Bill as introduced, which would have taxed the whole such distribution as income from other sources. What was enacted is s.56(2)(xii), which charges "any specified sum received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year", and defines the specified sum by formula: "Specified sum= A-B-C (which shall be deemed to be zero if sum of B and C is greater than A)", where A is the "aggregate of sum distributed by the business trust with respect to such unit, during the previous year or during any earlier previous year or years" that is not income under s.10(23FC) or s.10(23FCA) and not chargeable under s.115UA(2); B is the "amount at which such unit was issued by the business trust"; and C is the "amount charged to tax under this clause in any earlier previous year".
Read that as a running account against the issue price. Distributions of repayment of debt are not taxed while their cumulative total stays at or below the price at which the unit was issued; once they cross it, the excess is taxed as income from other sources in the year of crossing, and C stops the same excess being taxed twice in later years. There is also relief on redemption, under which the sum received is reduced by the cost of acquisition of the units to the extent that cost does not exceed the sum received. The amendment applies from assessment year 2024-25. In the Income-tax Act, 2025 the provision is carried into s.92(2)(k).
On the sale of the units themselves, the unit holder is in ordinary capital gains territory, and units of a business trust on which STT is paid fall within s.112A — see cost-of-acquisition-and-indexation for the rate and grandfathering machinery.
The single statement from the trust carries four components with four different answers, and the ITR needs each put under the right head — interest and the taxable part of dividend as other sources, rent under house property by force of the pass-through, repayment of debt outside income until the issue price is crossed, and gains on the units as capital gains. Getting the fourth wrong in either direction is expensive: taxing every repayment-of-debt distribution overstates income for years, while ignoring the running total means a large one-off charge is missed in the year the cumulative distributions pass the issue price. And because s.194LBA does not withhold on that component, nothing in Form 26AS will prompt the entry.
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