REIT & InvIT Dividend Tax Exemption – REIT and InvIT Dividends May Become Tax-Free: Lok Sabha Passes Key Amendment

REIT & InvIT Dividend Tax Exemption 2026 – Investors in Real Estate Investment Trusts, or REITs, and Infrastructure Investment Trusts, or InvITs, may receive significant tax relief following the passage of the Taxation and Other Laws (Amendment) Bill, 2026 by the Lok Sabha on 6 August 2026.

The Bill proposes that dividends passed on to unit holders by a REIT or InvIT should remain exempt from income tax even where the underlying Special Purpose Vehicle has opted for the concessional corporate tax regime under section 200 of the Income-tax Act, 2025.

However, investors should not interpret this amendment as making the entire distribution from a REIT or InvIT tax-free. The exemption is restricted to a specified dividend component. Interest income, certain rental income, capital gains on sale of units and other components will continue to be governed by their respective tax provisions.

The proposal is contained in the official Taxation and Other Laws (Amendment) Bill, 2026, read with the CBDT FAQs on the Amendment Bill. (Digital Sansad)

What are REITs and InvITs?

REITs and InvITs are collectively recognised as business trusts under income-tax law.

A REIT generally pools funds from investors and invests in income-generating real estate such as office buildings, shopping centres, hotels and commercial properties.

An InvIT similarly pools investor funds for investment in infrastructure assets such as roads, power transmission projects, pipelines and renewable-energy assets.

These trusts usually hold their operating assets through one or more companies known as Special Purpose Vehicles. The SPV earns income from the underlying property or infrastructure project, pays corporate tax and thereafter distributes the available profits to the business trust. The business trust then distributes the income to its unit holders.

The taxation of the unit holder depends on the original nature of the income received by the business trust.

Existing tax treatment of REIT and InvIT dividends

Under the earlier framework of the Income-tax Act, 1961:

• Dividend received by a business trust from its SPV was exempt in the hands of the business trust under section 10(23FC).
• The corresponding dividend distributed to the unit holder was generally exempt under section 10(23FD).
• However, the exemption was not available where the SPV had opted for the concessional corporate tax regime under section 115BAA.

Therefore, where the SPV had exercised the section 115BAA option, the dividend passed through the REIT or InvIT became taxable in the hands of the unit holder.

The Income-tax Department’s official guidance similarly states that dividend from an SPV opting for section 115BAA is taxable in the hands of the unit holder, whereas dividend from an SPV not opting for section 115BAA is exempt. (Etds)

Under the Income-tax Act, 2025, section 115BAA has broadly been replaced by section 200. Taxpayers and professionals can use the Income Tax Act 2025 Section Finder to compare the old and new section numbers.

What amendment has been proposed?

Schedule V of the Income-tax Act, 2025 specifies incomes that are not included in the total income of eligible persons, including business trusts and their unit holders.

Serial number 5 of Schedule V currently provides an exemption for distributed income received by a unit holder of a business trust. However, the exemption is denied in respect of the proportion of income representing:

1. Interest received by the business trust from an SPV;
2. Dividend received from an SPV where that SPV has opted for section 200; and
3. Rental or leasing income from real estate owned directly by a REIT.

Clause 5 of the Taxation and Other Laws (Amendment) Bill, 2026 proposes to omit clause (b) from this list of exclusions.

Once this clause is omitted, the dividend received from an SPV that has opted for section 200 will no longer lose its exempt character when distributed to the unit holder through the REIT or InvIT.

In simple terms:

Dividend distributed through a REIT or InvIT will be exempt for the unit holder irrespective of whether the underlying SPV is under the ordinary corporate tax regime or the concessional regime under section 200.

Tax treatment before and after the amendment

Nature of distribution	Existing position under the Income-tax Act, 2025	Position proposed by the Bill
Dividend from an SPV not opting for section 200	Exempt for unit holder	Exempt
Dividend from an SPV opting for section 200	Taxable for unit holder	Proposed to be exempt
Interest received from an SPV	Taxable for unit holder	No change; remains taxable
Rent from property owned directly by a REIT	Taxable for unit holder	No change; remains taxable
Capital gain on sale of REIT or InvIT units	Taxable under capital-gains provisions	No change
Other distribution or repayment components	Depends on their legal character	No general exemption created

The amendment is therefore targeted. It does not convert the entire REIT or InvIT distribution into exempt income.

Why has the Government proposed this change?

The CBDT has linked the proposal to the Minimum Alternate Tax reforms introduced through the Finance Act, 2026.

Under the revised MAT framework:

• MAT is intended to operate as a final tax in the old corporate tax regime.
• Accumulated MAT credit can generally be utilised when the company shifts to the new concessional regime.
• Consequently, an SPV of a business trust may find it commercially necessary to move to the concessional regime to utilise accumulated MAT credit or avoid the implications of final MAT taxation.

Under the existing provision, such a movement would have caused the unit holders to lose the dividend exemption. The proposed amendment removes this adverse consequence and provides greater tax certainty to investors.

Higher surcharge for the SPV

The benefit at the unit-holder level comes with a corresponding change at the SPV level.

The Finance Act, 2026 presently provides a surcharge of 10% for domestic companies opting for the concessional regimes under sections 200 or 201.

The Bill proposes two separate surcharge rates:

• 10% surcharge for an ordinary domestic company opting for sections 200 or 201; and
• 25% surcharge for a domestic company that is an SPV of a business trust.

Thus, the surcharge for the qualifying SPV will increase by 15 percentage points—from 10% to 25%.

Importantly, the 25% figure is a surcharge on the income-tax payable by the SPV. It is not a 25% tax on the dividend received by the investor, nor is it a flat corporate tax rate of 25%.

The REIT or InvIT management will therefore need to compare:

• Corporate tax payable by the SPV under the ordinary regime;
• Corporate tax under section 200;
• Additional surcharge cost;
• Availability of MAT credit;
• Expected dividend distributions; and
• Overall distributable cash flow available to unit holders.

The concessional regime may not automatically be advantageous in every case.

Practical illustration

Suppose an investor receives the following distribution from a listed REIT during Tax Year 2026-27:

• Dividend attributable to an underlying SPV: ₹1,00,000
• Interest attributable to the SPV: ₹30,000
• Total distribution: ₹1,30,000

Assume that the SPV has opted for the concessional tax regime under section 200.

Under the existing provision

• Dividend of ₹1,00,000: Taxable
• Interest of ₹30,000: Taxable
• Total taxable distribution: ₹1,30,000

After the proposed amendment

• Dividend of ₹1,00,000: Exempt
• Interest of ₹30,000: Taxable
• Total taxable distribution: ₹30,000

The investor’s tax saving would broadly correspond to the tax otherwise payable on the ₹1,00,000 dividend component, depending on the investor’s residential status, applicable tax rate and other income.

What will continue to be taxable?

Investors must continue to examine the component-wise break-up of every REIT or InvIT distribution.

1. Interest income

Interest received by a business trust from its SPV and distributed to unit holders will continue to be taxable in the hands of the unit holder. The proposed Bill does not remove the interest exclusion from Schedule V.

2. Rental income from directly held property

Where a REIT directly owns a real estate asset and distributes the rent, lease income or letting-out income from that asset, the amount will continue to be taxable in the hands of the unit holder.

3. Capital gains on sale of units

The exemption relates to dividend distributed through the business trust. It does not exempt gains arising from the sale of REIT or InvIT units on the stock exchange.

Capital gains on business trust units must be calculated separately based on the holding period, transaction date, acquisition cost, Securities Transaction Tax conditions and applicable capital-gains provisions.

Investors may use the Capital Gain Tax Calculator for an indicative computation, although the final calculation should be reconciled with the broker statement and AIS/TIS.

4. Other distribution components

REIT and InvIT distributions may also include repayment of shareholder debt, amortisation, return of capital or other non-dividend components. Their tax treatment is not changed merely because the Bill grants an exemption to a specified dividend component.

Such amounts should be examined separately under the applicable provisions.

Important distinction: AY 2026-27 versus Tax Year 2026-27

The Bill provides that, except where otherwise specified, the amendment will be deemed to have come into force from 1 April 2026 once it is enacted.

This means that the amendment is intended to apply to income arising during Tax Year 2026-27, beginning on 1 April 2026.

It should not be confused with the return for Assessment Year 2026-27, which relates to income earned from 1 April 2025 to 31 March 2026 and continues to be governed by the Income-tax Act, 1961.

The transition between the two laws is explained in detail in our article on the Income-tax Act 2025 transition and the new tax-year system. The Bill itself provides for deemed commencement from 1 April 2026.

Is the exemption already legally effective?

Not finally.

As of 6 August 2026:

• The Bill has been passed by the Lok Sabha.
• The official Sansad portal classifies it as a Money Bill.
• It must be sent to the Rajya Sabha for its recommendations.
• It will thereafter require the President’s assent.
• The final enacted provisions must be checked from the Official Gazette.

Under Article 109 of the Constitution, the Rajya Sabha may make recommendations on a Money Bill within 14 days. The Lok Sabha may accept or reject those recommendations. (Digital Sansad)

Therefore, investors should presently describe the exemption as a proposed exemption passed by the Lok Sabha, rather than an unconditional exemption already available under a finally enacted law.

ITR reporting precautions for investors

Once the amendment is enacted, investors should not report the gross REIT or InvIT distribution as exempt without checking its composition.

The following documents should be retained:

1. Annual distribution statement issued by the REIT or InvIT;
2. Break-up of dividend, interest, rental and other income;
3. Broker ledger and contract notes;
4. AIS and TIS information;
5. TDS details, where any tax has been deducted;
6. Details of the underlying SPV and its applicable tax regime; and
7. Purchase and sale records where units have been transferred.

Any mismatch between the distribution statement, AIS, TDS details and the income-tax return may result in incorrect taxation or an automated compliance communication.

Investors requiring assistance with dividend income, investment income, capital gains and AIS reconciliation may refer to our CA-assisted ITR filing and investment taxation services.

Frequently Asked Questions

1. Are all dividends from REITs and InvITs now tax-free?

No. The proposal covers the proportion of distributed income representing dividend received from a qualifying SPV. The character and source of the distribution must be verified from the trust’s statement.

2. Will interest distributed by a REIT or InvIT also become exempt?

No. Interest received from the SPV and passed on to unit holders will continue to be taxable.

3. Is the 25% surcharge payable by the investor?

No. The proposed 25% surcharge applies to the income-tax payable by the underlying SPV where it opts for the specified concessional corporate tax regime.

4. Does the exemption apply when the SPV remains under the old regime?

Dividend attributable to an SPV that has not opted for section 200 is already exempt under the existing framework. The amendment principally benefits unit holders where the SPV opts for section 200.

5. Does the Bill exempt capital gains on REIT and InvIT units?

No. Capital gains arising from sale or transfer of units remain taxable under the applicable capital-gains provisions.

6. From which date will the amendment apply?

The Bill proposes deemed commencement from 1 April 2026, except for provisions for which a separate date is specified. However, final applicability should be confirmed after Presidential assent and Gazette notification.

7. Does it change the ITR for Assessment Year 2026-27?

No. AY 2026-27 relates to income earned up to 31 March 2026 and is governed by the Income-tax Act, 1961. The proposed amendment applies from 1 April 2026 under the Income-tax Act, 2025.

Conclusion

The proposed REIT InvIT dividend tax exemption is a significant and investor-friendly amendment. It removes a tax disadvantage that arose when the underlying SPV opted for the concessional corporate tax regime under section 200.

Once enacted, the dividend component passed through the REIT or InvIT will remain exempt for the unit holder even where the SPV is under the concessional regime. At the same time, the SPV will bear a higher surcharge of 25%.

Investors must nevertheless avoid treating every REIT or InvIT distribution as tax-free. Interest income, directly earned rental income, capital gains and other distribution components will continue to require separate examination.

The final position should be confirmed after completion of the Money Bill process, Presidential assent and publication of the enacted law in the Official Gazette.

Disclaimer: This article is intended for general professional and educational information. The appropriate tax treatment must be determined from the applicable law, assessment year, governing documents and facts of each case.

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