Since the turn of the century, infrastructure has been a shining star in India, fueling the nation’s rapid economic growth. In 2014, the introduction of Real Estate Investment Trusts (REIT) Regulations marked a big step for the real estate market.
So, what is REIT?
Imagine having a ticket to the world of real estate without actually buying properties – that’s where Real Estate Investment Trusts (REITs) step in.
REIT is an entity that owns and operates real estate to generate income. It is essentially like a mutual fund that invests in real estate. The REIT pools money from small investors and invests in properties such as office spaces, hospitals, shopping malls, hotels, apartments, warehouses, etc. The rental income earned from these properties is then distributed back to investors in the form of dividends.
In India, the concept of REITs is relatively new. A REIT is set up in the form of a trust registered with the stock market regulator SEBI. Some of the REITs in India are Embassy Office Parks, Mindspace Business Parks REIT, Brookfield India Real Estate REIT, and Nexus Select Trust REIT.
How does a REIT work?
- A REIT is created by a sponsor, who transfers ownership of assets to the trust in exchange for its units.
- Think of it like a mutual fund, where money is pooled from investors in return of which the investor gets mutual fund units, and then on behalf of the investor mutual fund invests that in stocks and other securities. Now, instead of stocks and other securities, the funds will have investments in either SPVs (Special Purpose Vehicles) owning projects; or directly in real estate or infrastructure projects. SPV means an Indian company in which business trust holds a controlling interest and any specific percentage of shareholding. (more than 50%)
- The funds will earn income from the SPV/projects and the income will be distributed to the investors. The units of the trust can be listed on the stock exchange. Investors will be able to sell the units on the stock exchange also.
Returns To Expect From REITS
- Rental income, dividends, and interest: Rental income is earned by a REIT from direct investments in properties whereas dividend income is earned if such investments are made through a SPV. Interest income is generated by a REIT if investments are made in MBS (Mortgage-backed securities) or debt instruments.
- Capital appreciation: Just like how the price of stocks rises or falls over time, the units of the REIT also appreciate or depreciate in value. Since investors indirectly own a portion of the property that REITs buy, the investments grow in tandem with the value of the properties that the REIT holds.
Taxation of REITs in the hands of Resident investors
- Interest and rental income from REIT units are taxed at the resident’s applicable tax slab rate. TDS is also deductible u/s 194 LBA at 10%.
- Dividend income is tax-exempt if the REIT’s SPV has not opted for the lower tax regime under section 115BAA of the Income-tax Act, 1961.
- Dividend income is taxable at the applicable tax slab rate if the REIT’s SPV has opted for the lower tax regime under section 115BAA of the Income-tax Act, 1961. TDS is also deductible u/s 194 LBA at 10%.
- LTCG on the sale of listed REIT units on which STT is paid, if held for more than 36 months, are taxed at 10% u/s 112A above ₹1 lakh, and STCG on the sale of REIT units, if held for up to 36 months, are taxed at 15% u/s 11A.
- LTCG on the sale of unlisted REIT units, if held for more than 36 months, are taxed at 20% u/s 112, and STCG on the sale of REIT units, if held for up to 36 months, are taxed at normal slab rates.
- Any other income except covered in the above points shall be exempt in the hands of the investor u/s 10(23FD)
- According to Finance Act 2023, ‘Loan repayment’ must be reduced from the cost of acquisition at the time of sale of the unit by the investor.
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