Despite the higher surcharge, the concessional regime can still offer a lower effective tax rate in relevant cases.
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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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cRestoring the dividend exemption for business trust unitholders removes a key structuring friction and provides greater certainty on returns,\u201d said Kunal Savani, Partner at Cyril Amarchand Mangaldas. \u201cHowever, 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.\u201d<\/p>\n
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.<\/p>\n
\u201cOver 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,\u201d Jain said.<\/p>\n
Pallav Pradyumn Narang, Partner at CNK said that the surcharge counterweighs the benefit as it could potentially lead to a higher tax outflow. \u201cThe government should consider doing away with the additional surcharge levy or perhaps a lower rate of surcharge increase,\u201d Narang said.<\/p>\n
Despite the higher surcharge, the concessional regime can still offer a lower effective tax rate in relevant cases. The effective rate can be around 28.60 per cent, compared with about 34.94 percent under the old framework.<\/p>\n
\u201cWhile 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,\u201d said Ankit Jain, Partner at Ved Jain and Associates.<\/p>\n
Preeti Chheda, CFO, Mindspace REIT and Executive Committee Member, Indian REITs Association, said the reform \u201callows REITs to transition to the new corporate tax regime while maintaining the existing tax treatment of distributions in the hands of unitholders.\u201d This continuity is key to preserving the structure and attractiveness of the instrument, she said.<\/p>\n
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.<\/p>\n
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