REIT & InvIT Payouts: Tax-Free Dividends, Taxable Income

If you’re investing in REITs or InvITs, there’s a significant tax change on the horizon that could affect your payouts. The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on August 6, proposes to make your dividend distributions tax-exempt.

This amendment is designed to offer you tax relief, especially if you fall into a higher tax bracket, by ensuring dividends remain exempt regardless of the SPV’s tax choices. Previously, dividends from these Special Purpose Vehicles (SPVs) could be taxed at your regular slab rates, a situation you couldn’t control.

What Components Will Still Be Taxed?

However, it’s really important to understand that this proposed change doesn’t mean your entire REIT or InvIT distribution will become completely tax-free. Your distributions often include several parts, and each has its own tax rules. Here’s what you need to know about the proposed changes:

• Dividends: Only the dividend portion from an SPV opting for the new tax regime would receive this additional exemption.
• Interest Income: This will continue to be taxed at your applicable slab rate.
• Rental Income: This component keeps its current tax treatment.
• Capital Gains: Any gains you make from selling your REIT or InvIT units will remain taxable.

Let’s look at an example given in the source to make this clear:

• If your total distribution is ₹1 lakh:
• ₹60,000 from interest will still be taxable.
• ₹40,000 from dividends would be exempt under the new proposal.

Why This Matters for SPVs

Beyond your personal tax situation, these changes also bring benefits at the SPV level. Rajesh Deo, CFO of Nexus Select Malls, explained that allowing REIT SPVs to choose a concessional tax regime and use Minimum Alternate Tax (MAT) credits could significantly boost cash-flow efficiency.

This improved efficiency could free up capital for things like reinvestment, reducing debt, enhancing assets, or even increasing distributions to you, the unitholder. While Tax Deducted at Source (TDS) will still apply to both interest and dividend components for resident unit holders, you can claim this amount as a tax credit when filing your income tax returns and seek a refund if it exceeds your final tax.

Remember, capital gains from selling your units are not part of this proposed relief and will still follow existing tax rules. Before making any investment decisions, you should carefully review the breakup of your distributions and payout patterns, and wait for Presidential assent for this proposed dividend exemption to officially become law.