REIT, InvIT payouts won’t become fully tax-free: Which components will still be taxed?

REIT and InvIT investors may get tax relief on the dividend component if the proposed 2026 amendment becomes law, but other payout components will continue to have separate tax treatment. Interest income, rental income and capital gains will not automatically become tax-free.

The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on August 6, proposes to extend the dividend exemption to REIT and InvIT unit holders even when the underlying special purpose vehicle (SPV) opts for the new concessional tax regime.

What changes for REIT, InvIT investors?

Under the existing rules, the dividend component of a REIT or InvIT distribution is exempt when the underlying SPV is taxed under the old corporate tax regime. However, if the SPV chooses the new tax regime, the dividend can become taxable in the hands of investors at their applicable slab rates.

The proposed amendment seeks to remove this condition. If enacted, the dividend received by unit holders would remain exempt irrespective of the tax regime selected by the underlying SPV.

The change could particularly benefit investors in higher tax brackets. According to CA Parag Jain, tax head at 1 Finance, an investor in the 30% tax bracket receiving ₹75,000 as dividend from a REIT whose SPV has opted for the new regime currently pays approximately ₹23,400 in tax. If the proposed amendment becomes law, the tax liability on that dividend would fall to nil.

The proposal also addresses a structural issue because investors have no control over the tax regime selected by an underlying SPV, even though that decision can affect the tax payable on their distributions.

REIT payouts will not become entirely tax-free

Importantly, the proposed exemption does not mean that an entire REIT or InvIT distribution will become tax-free.

Distributions can contain multiple components, including dividend, interest, rental income and capital-related components, and each can have a different tax treatment.

Under the proposed change, only the dividend component from an SPV opting for the new tax regime would get the additional exemption.

Interest income would continue to be taxable at the investor's applicable slab rate. Rental income would retain its existing tax treatment, while capital gains arising from the sale of REIT or InvIT units would remain taxable.

For example, if an investor receives ₹1 lakh in total distributions, comprising ₹60,000 in interest and ₹40,000 in dividend, the proposed exemption would apply only to the ₹40,000 dividend. The ₹60,000 interest component would continue to be taxable.

This makes it important for investors to examine the composition of distributions rather than looking only at the headline yield.

MAT credit provision could improve REIT efficiency

The proposed changes could also have an impact at the SPV level through provisions relating to accumulated Minimum Alternate Tax (MAT) credits.

Rajesh Deo, Chief Financial Officer, Nexus Select Malls, said the ability for REIT SPVs to evaluate and opt for a concessional tax regime, along with the utilisation of accumulated MAT credits, could materially improve cash-flow efficiency at the asset level.

“The provision around MAT credits is particularly meaningful. In our case, the MAT credit of a significant amount as of March 2026 represents a tangible balance-sheet asset, and the proposed framework could enable a more efficient utilisation of such credits,” Deo said.

For REITs, better utilisation of these credits could potentially release capital for reinvestment, deleveraging, asset enhancement or distributions to unitholders.

Deo added that the continued tax treatment of distributions in the hands of unitholders preserves the core investment proposition of REITs while giving underlying SPVs greater flexibility in managing their tax structures.

At a broader level, the proposed changes could therefore work at two levels—improving tax and cash-flow efficiency for SPVs while making the tax treatment of dividend distributions more predictable for investors.

What about TDS?

Investors also need to consider tax deducted at source (TDS). According to Jain, TDS is deducted on both interest and dividend components for resident unit holders.

Even if the dividend becomes exempt under the proposed amendment, the TDS deduction does not automatically disappear. Investors can claim the deducted amount as a tax credit while filing their income tax returns and seek a refund if the deduction exceeds their final tax liability.

Capital gains relief is not part of the proposal

Investors should also distinguish the proposed dividend relief from taxation on gains made by selling REIT or InvIT units.

The proposed amendment does not make capital gains tax-free. Any gains arising from the sale of units would continue to be governed by the applicable capital gains tax rules.

Jain advised investors to review the breakup of REIT and InvIT distributions, including notices issued by the trusts, and examine the pattern of payouts over the previous two to three years before making an investment decision.

The proposed amendment could improve post-tax returns and provide greater certainty, particularly for investors in higher tax brackets. However, investors should wait for Presidential assent before treating the proposed dividend exemption as an enacted tax benefit.