REITs and InvITs become attractive after major taxation overhang removed

• The finance bill has brought the debt repayment component of distribution income by REITs and InvITs under tax.
• However, only a small portion of the amount will attract tax as the taxed amount will be calculated after deducting the cost of acquisition of units at the time of sale of units.
• With this, analysts are positive REITs and InvITs and consider it as an attractive investment product.

One of the major amendments in the finance bill softened the tax impact on unitholders of Real Estate Investment Trusts (REITs), and Infrastructure Investment Trust (InvITs).

REIT is an investment product that lets you invest in real estate without buying an actual property. REITs are companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels and tend to pay high dividends. InvITs are the same, but invest in infrastructure assets instead.

The finance bill has brought the debt repayment component of distribution income by REIT and InvIT under tax. Now only a portion of the amount will attract tax as the taxed amount will be calculated after deducting the cost of acquisition of units at the time of sale of units.

“The amendment to the Finance Bill has led to moderation in tax incidence for repayment of capital, as the same would now be reduced from the cost of acquisition to the extent of issued capital. The amended stance substantially reduces the tax incidence, as a capital gains tax at the point of sale rather than marginal tax rate on receipt of payment,” said a report by Kotak Institutional Equities.

With this, analysts are positive REITs and InvITs and consider it as an attractive investment product.

Prior to the union budget FY24, the unit holder was not taxed on dividend distribution and return on capital, only the interest income was taxed at the marginal tax rate, said analysts at JM Financial.

“Finance Bill 2023 has proposed that the tax will be levied on the distributed proceeds net of issue price (capital) in the hands of the REIT/InvIT unit holders, making the capital distribution tax free for an extended period of time, thus improving post-tax yield. This new amendment increases the relative attractiveness of REITs / InvITs as the major taxation overhang is removed. However, the proceeds will be taxed at slab rates and not as capital gains (10% on long-term gains and 15% on short-term gains),” said a report by JM Financial.

A report by Kotak Institutional Equities says they are positive on the sector as “leasing momentum continues to be strong and current REIT prices imply attractive FY2024E yields of 7-8%. We remain positive on the sector.”

The proposed amendment is largely in line with the representations made by the industry to the government. Commercial real estate in top Indian cities in 3QFY23 saw the second-highest quarterly gross absorption in the past 10 years at 20 million square feet.


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