The proposed tax overhaul for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) could make dividend income more predictable for investors, but a higher surcharge payable by their underlying special purpose vehicles (SPVs) could limit the immediate benefit to distributions, according to The Hindu BusinessLine. The recent taxation bill passed by the Lok Sabha proposes to allow REIT and InvIT SPVs to opt for the concessional corporate tax regime without making the dividend component of distributions taxable in the hands of unitholders. The changes will reduce uncertainty around REIT and InvIT fundraising and bring in new launches, but the regime itself can become more expensive due to the rise in surcharge to 25 per cent from 10 per cent, experts said.
Dividend Exemption and Structuring Certainty
The amendment, according to The Hindu BusinessLine, separates two decisions that were previously linked: the tax regime of the underlying SPV and the tax treatment of the dividend received by the unitholder. Kunal Savani, Partner at Cyril Amarchand Mangaldas, said in the report:
"Restoring the dividend exemption for business trust unitholders removes a key structuring friction and provides greater certainty on returns. However, the increase in surcharge is a revenue-balancing measure that sponsors must factor into distribution economics, particularly since MAT is now a final non-creditable tax from FY 2026-27, potentially driving more SPVs towards the regime."
Preeti Chheda, CFO of Mindspace REIT and Executive Committee Member of the Indian REITs Association, said the reform "allows REITs to transition to the new corporate tax regime while maintaining the existing tax treatment of distributions in the hands of unitholders." She added, according to the report, that this continuity is key to preserving the structure and attractiveness of the instrument.
The Surcharge Trade-Off
The higher surcharge would also mean the impact on distributable cash flow will not be uniformly positive. Rahul Jain, President & Head at Nuvama Wealth, said distribution per unit (DPU) could decline marginally in the near term if SPVs move to the new regime because of the higher surcharge. "Over the longer term, however, better tax efficiency, possible use of accumulated MAT credits and stronger capital flows into the sector should support growth in distributions," Jain said.
Pallav Pradyumn Narang, Partner at CNK, said the surcharge counterweighs the benefit as it could potentially lead to a higher tax outflow. "The government should consider doing away with the additional surcharge levy or perhaps a lower rate of surcharge increase," Narang said.
Despite the higher surcharge, the concessional regime can still offer a lower effective tax rate in relevant cases, the report noted.
| Metric | Old Framework | New Concessional Regime |
|---|---|---|
| Surcharge on SPVs | 10% | 25% |
| Effective corporate tax rate | ~34.94% | ~28.60% |
Migration Outlook and Industry Reaction
Ankit Jain, Partner at Ved Jain and Associates, said: "While the surcharge appears high on paper, the math still strongly favours the transition. We expect a phased migration where mature SPVs with stranded MAT credits will shift immediately, directly boosting net distributable cash flows over the next few quarters."
For investors, the proposed amendment separates two decisions that were previously linked: the tax regime of the underlying SPV and the tax treatment of the dividend received by the unitholder, according to The Hindu BusinessLine. The proposed changes will reduce uncertainty around REIT and InvIT fundraising and bring in new launches, experts told the publication. The effective rate under the concessional route, about 28.60 per cent against roughly 34.94 per cent under the old framework, remains the headline trade-off that sponsors and unitholders will have to weigh as the bill moves toward enactment, the report indicated.
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