A REIT distribution is not one thing. It is three: interest, dividend, and return-of-capital. Each has different tax treatment. The Rs. 10,000 you received from Embassy Office Parks REIT last quarter is going to split across three lines of your ITR. And most filers lump it all as "other income" at slab. Done right, the effective tax on REIT distributions is 15-18%; done wrong, it can climb to 30%+. The AIS now labels the split but the ITR schedule expects you to tag it correctly.
By the end, you will know how each REIT/InvIT distribution component is taxed, the AIS label that distinguishes them, the capital-gain rules on unit sale, and the tax shelter that unique-purpose SPVs provide.
The three components
- INTEREST. Slab rate. The REIT passes through interest it earned on loans to its SPVs (Special Purpose Vehicles that hold the underlying assets).
- DIVIDEND. Depends on whether the SPV opted for the lower-tax regime under section 115BAA (22% corp tax, no 80G etc. concessions). If SPV opted into 115BAA, dividend is taxable at slab in unitholder's hands. If SPV did NOT opt for 115BAA, dividend is exempt at unitholder level (double-tax avoidance).
- RETURN OF CAPITAL. Reduces your cost of acquisition for eventual capital-gain calc. Not taxable on receipt; taxable as capital gain when you sell units.
Mindshare REIT and Embassy Office Parks REIT pass through all three components quarterly. The distribution statement from the REIT identifies the split. Match that split in ITR: interest goes to Schedule OS (other sources), dividend to Schedule OS with appropriate TDS credit, return of capital reduces Schedule CG cost basis at sale.
Capital gain on unit sale
REITs and InvITs are listed securities, STT-paid. Held > 12 months: LTCG at 12.5% above Rs. 1.25L (section 112A). Held <= 12 months: STCG at 20% (section 111A). Same treatment as listed equity for capital gains. The tax advantage is identical. So if you hold REIT units for 18 months, sell at a gain, you get the 12.5% LTCG concession PLUS you received 6 quarterly distributions during the hold. Tax-efficient combination.
The SPV structure and dividend pass-through
REITs are trust-structures holding shares of SPVs (each SPV owns an underlying asset. A mall, an office tower, a logistics park). The SPV earns rent and profits, pays corporate tax at its chosen regime (old or 115BAA), and distributes residual cash up to the REIT. The REIT then distributes to unitholders. The dividend portion of the distribution reflects SPV-level profit distributed up. If SPV pays 25% corp tax (old regime), the dividend is exempt at unitholder level. No double tax. If SPV opted into 22% new regime (115BAA), it forgoes some deductions in exchange for a lower rate, and dividend to unitholders is slab-taxable at unitholder level. Check the REIT's quarterly announcement for the tax-regime status of each SPV.
