Real Estate Investment: How are dividends from REITs taxed? Check regulations and other details  

Real estate investment trusts (REITs) are funds that put their money into industrial and commercial real estate to generate revenue. It is a pass-through entity for income tax purposes, therefore dividends paid to investors are taxed as if they were received straight from the underlying special purpose vehicle (SPV). The Income Tax Act of 1961 stipulates that the taxation of the dividend income paid by the Reit  will be determined by whether the underlying SPV of the Reit has chosen the advantageous tax structure under section 115BAA.

What is the taxation structure?

The dividend obtained by the unitholders is taxable as ordinary income at the relevant slab rate if the SPV has chosen the favourable tax regime under section 115BAA. Additionally, under section 194LBA of the act, the Reit is obliged to deduct taxes amounting to 10 percent from the dividend in such a scenario. On the other hand, if the SPV has not chosen the advantageous tax regime under section 115BAA, the dividend income received by unitholders shall be free from tax under section 10(23FD) of the act. Additionally, the Reit will not deduct tax at source (TDS).

The tax structure employed by the underlying SPVs of Reit can be understood by consulting  the trust’s investment plan or by contacting the particular Reit. Concerning the types of incomes earned or distributed by Reit, you may also refer to the financial statements, investor reports, and income distribution letters released from time to time.

Real estate investing requires a large initial investment. People have a difficult time purchasing real estate because of the low liquidity and high investment. An alternate method for acquiring exposure to real estate is to participate in REITs. Investors are capable of purchasing even a single share of REITs at their listed price and selling those shares on the exchange for the going market rate.

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If owned for less than a year, a 15 percent short term capital gains tax is applied to capital gains generated on the sale of Indian REITs. Over Rs. 1 lakh of investment retained for more than a year is liable to pay long term capital gains tax at a rate of 20 percent.

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