The Government of India on Friday proposed to soften the tax impact on Real estate investment trusts (REITs) and Infrastructure investment trusts (InVITs) through amendments to the Finance Bill.
The Finance Bill had earlier proposed to tax distribution from business trust as income from other sources at applicable rate.”This is now proposed to be treated as return of capital, i.e reduction from cost of acquisition, till the cost at which the unit was issued,” an official said.
However, any amount in excess of the issue price would be taxable as income. Thus, the change would benefit the unitholders vis-a-vis the earlier proposal, the official added. The Bill has been approved by the Lok Sabha. Piyush Gupta, MD, Capital Markets & Investment Services at Colliers India said the Union budget in February 2023 had announced that the income received by REIT/InvITs unitholders in the form of ‘repayment of debt’ will be taxed from April 2024, as other income which was otherwise not taxable.
Under the amended laws only a portion of such distributions or a ‘specified sum’ will be taxed. The specified sum is arrived at after taking out the cost of acquisition from the distributed amount.If a REIT or InvIT had an issue price of ₹100 and in 2024, the amount distributed (as capital repayment) was ₹20, there will be no tax on this since it is lower than the issue price.
If in future the trust’s cumulative distribution becomes ₹110, then ₹10 is taxed in the hands of the unitholder. If in the subsequent year the amount increases to ₹130, then tax will be on ₹20, since tax has already been paid on ₹10 in the previous year.