REIT and InvIT taxation
How the pass-through rule taxes each part of a business-trust payout, and the gains on units
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are SEBI-regulated business trusts, and under the pass-through rule (Section 115UA) each distribution keeps the character of the underlying income and is taxed accordingly in your hands. So there is no single REIT rate: the interest component is taxed at your slab rate, the rental component at your slab rate, the dividend component is taxed at slab if the underlying company opted into the 22% regime (otherwise exempt), and the return-of-capital component is now taxed as income from other sources (the law change closed the old tax-free-cashflow gap). Capital gains when you sell listed units are separate: 12.5% long-term (held over 12 months, over the Rs 1.25 lakh exemption) or 20% short-term.
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Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact Income Tax Department. Read our editorial scope →
The pass-through rule: each part keeps its character
Under Section 115UA, a business trust is largely a conduit: it does not pay tax on most income at the trust level, and instead each distribution to you keeps the character of the income it came from and is taxed in your hands accordingly. So a single REIT payout can have several tax characters: an interest component (taxed at your slab rate), a rental component (slab rate), a dividend component (taxed at slab if the underlying special-purpose company opted into the 22% concessional regime, otherwise exempt), and a return-of-capital or loan-repayment component. Two investors in the same trust can owe quite different tax depending on the mix and their own slab. The trust deducts TDS under Section 194LBA on taxable distributions before paying.
Return of capital is no longer tax-free
A return-of-capital or loan-repayment distribution used to be a tax-free cashflow in many investors' hands, a gap the law closed. Such a specified-sum distribution is now taxable as income from other sources in the year received (broadly, to the extent it exceeds the issue price, with the rest adjusting the cost of the units). So the part of a REIT or InvIT payout labelled return of capital should not be assumed tax-free, check how the trust has characterised each component in its distribution statement and tax it accordingly.
warningThe return-of-capital part of a REIT or InvIT payout is no longer automatically tax-free, the law now taxes the specified-sum distribution as other-source income. Read the trust's component breakdown each year.
Gains on the units themselves
Selling your listed REIT or InvIT units is a separate capital-gains event from the distributions. Following the Finance Act 2024, listed business-trust units are treated like other listed securities: a gain is long-term if you held the units for more than 12 months (taxed at 12.5% above the Rs 1.25 lakh annual exemption that applies to listed equity-type gains) and short-term if held for 12 months or less (taxed at 20%). This is distinct from the 194LBA TDS on distributions, which does not cover the gain on the units. So a REIT investor has two tax streams: the pass-through distributions, and the capital gain on exit.
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Calculators
Source / notes
- Income-tax Act 1961 s.115UA (REIT/InvIT pass-through) + s.194LBA (distribution TDS) (re-enacted in the Income-tax Act 2025)
- Income-tax Act 1961 ss.112A/111A (listed-unit capital gains, FA2024 12-month holding period)
- FA2023 (taxation of specified-sum / return-of-capital distributions)
Frequently asked questions
How is REIT income taxed in India?+
By character, not at one flat rate. Under the Section 115UA pass-through, each part of a distribution is taxed as what it is: the interest and rental components at your slab rate, the dividend component at slab if the underlying company is on the 22% regime (otherwise exempt), and the return-of-capital component as income from other sources. The trust deducts TDS under 194LBA on taxable distributions. Two investors in the same trust can owe different tax.
Is the return of capital from a REIT tax-free?+
Not any more. A return-of-capital or loan-repayment distribution (a specified sum) is now taxable as income from other sources, broadly to the extent it exceeds the issue price, with the balance adjusting your unit cost. The law closed the old gap that let this part flow tax-free. So check how the trust has characterised each component of the payout rather than assuming the return-of-capital part is exempt.
How are gains on selling REIT units taxed?+
As capital gains, separately from the distributions. Following the Finance Act 2024, listed REIT and InvIT units are long-term if held more than 12 months (taxed at 12.5% above the Rs 1.25 lakh exemption) and short-term if held 12 months or less (taxed at 20%). The holding period was reduced to 12 months to align with other listed securities. This gain is distinct from the 194LBA TDS on distributions.
Is a REIT better than buying property directly for tax?+
They differ in structure rather than being simply better or worse. A REIT gives professionally managed, liquid, pass-through exposure where each income type keeps its character and the units have listed-security capital-gains treatment; direct property gives you house-property taxation on rent (with the 30% standard deduction and loan interest) and property capital-gains rules on sale, but with hands-on management. The right choice depends on your capital, involvement and liquidity needs, not tax alone.
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