Taxation of REITs, InvITs and Business Trusts: Unit Holder Tax and TDS (Income Tax Act 2025)

A business trust is a SEBI-registered Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT). Under section 223 of the Income Tax Act 2025, what the trust pays out keeps the nature it had in the trust's hands, so a unit holder is taxed on interest, rent or other receipts according to what they were. Interest and dividend from a special purpose vehicle (SPV) and rent from real estate a REIT owns directly are exempt in the trust and taxed in the unit holder's hands, with 10% TDS and no threshold on payments to residents.

This guide covers the trust's own tax, the unit holder's tax, the TDS rules, the "specified sum" rule that taxes return of capital above the issue price, and what happens when you sell units. The law is as amended by the Finance Act 2026, effective 1 April 2026 (tax year 2026-27). Examples use tax year 2026-27 and ignore surcharge and cess.

What is a business trust under the Income Tax Act 2025?

Section 2(21) defines a "business trust" as a trust registered as either an Infrastructure Investment Trust or a Real Estate Investment Trust under the respective SEBI regulations of 2014. Nothing else qualifies. A "unit holder" is the investor who holds units in that trust.

A trust usually holds its projects through special purpose vehicles. Schedule V, Note 2 describes an SPV as an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest required by the law under which the trust is registered. A REIT may also own real estate directly. The tax treatment of what flows up from each source is different, which is why the rules look detailed.

How is the business trust itself taxed?

Section 223(2) says the total income of a business trust is charged to tax at the maximum marginal rate, subject to sections 196, 197 and 198 (the special capital gains rates). Two kinds of income are exempt in the trust's hands, so that tax falls on the unit holder instead (Schedule V, Table Sl. Nos. 3 and 4):

Schedule V Sl. No.	Income of the business trust	Trust's tax
3	Interest or dividend received or receivable from a special purpose vehicle	Nil
4	Rent from real estate owned directly by a REIT (renting, leasing or letting out of a real estate asset)	Nil
Everything else	Remaining income of the trust	Maximum marginal rate (section 223(2)), or the capital gains rates in sections 196 to 198

Schedule V Sl. No. 3 covers both SPV interest and SPV dividend. The article's examples use interest and rent only. "Real estate asset" takes its meaning from regulation 2(1)(zj) of the SEBI REIT Regulations, 2014 (Schedule V, Note 3).

How are distributions taxed in the unit holder's hands?

Section 223(1) applies irrespective of anything else in the Act. Income distributed by a business trust to unit holders is deemed to be of the same nature, and in the same proportion, in the unit holder's hands as the trust received it. If 60% of what the trust earned was SPV interest, 60% of the distribution is interest in your hands.

Section 223(3) adds a specific rule. When the distributed income is of the nature in Schedule V Sl. No. 3 (SPV interest or dividend) or Sl. No. 4 (REIT direct rent), it is deemed income of the unit holder and is charged to tax in that tax year. Schedule V Sl. No. 5 also stops a unit holder from claiming exemption on the proportion of a distribution that has the nature of SPV interest or REIT direct rent (the SPV dividend limb of Sl. No. 5 was omitted by Act No. 21 of 2026, with effect from 1 April 2026).

What is the TDS rate on REIT and InvIT distributions?

Section 393(1), Table Sl. No. 4(ii) covers any distributed income referred to in section 223, of the nature in Schedule V Sl. Nos. 3 and 4, payable to a unit holder of a business trust. The business trust is the deductor. The rate is 10% and the threshold limit is nil, so tax is deducted on every rupee of such income paid to a resident.

Payee	Nature of distributed income	TDS rate	Where
Resident unit holder	SPV interest, SPV dividend or REIT direct rent (Sch V Sl. 3 and 4)	10%, nil threshold	393(1), Sl. 4(ii)
Non-resident, not a company, or a foreign company	SPV interest (Sch V Sl. 3)	5% for the interest limb	393(2), Sl. 6(a)
Non-resident, not a company, or a foreign company	REIT direct rent (Sch V Sl. 4)	Rates in force	393(2), Sl. 7

Sl. No. 6(b) of the non-resident table sets 10% for the SPV dividend limb (referred to there as Schedule V Sl. No. 3.B(b)).

The list of payments on which no tax is deducted that follows the section 393(1) table has two entries on this topic. Rent paid to a REIT for real estate it owns directly (Schedule V Sl. No. 4) is not subject to TDS in the payer's hands (Sl. No. 2). Income from units of a business trust of the Sch V Sl. No. 3.B(b) nature is not subject to TDS if the SPV has not exercised the option under section 200 (Sl. No. 5).

What statement must the trust give unit holders?

Section 223(5) requires the person responsible for paying distributed income on behalf of the business trust to furnish a statement to the unit holder and to the prescribed authority. Rule 145 sets the details (Table Sl. No. 2, business trust):

Statement	Form	Given to	Due date
To the tax authority	Form 76, verified by an accountant (section 515(3)(b))	Principal Commissioner or Commissioner of Income-tax where the trust's principal office is	15 June after the tax year
To the unit holder	Form 77	The unit holder	30 June after the tax year

For distributions in tax year 2026-27, that means 15 June 2027 and 30 June 2027. The statement to the unit holder is generated and downloaded from the web portal and verified by the person paying (rule 145(3)). Form 77 tells you how much of what you received was interest, rent or other receipts, which is what you need to report correctly.

What is the "specified sum" in section 92(2)(k)?

Distributions that are not interest or rent of the Schedule V Sl. 3 or 4 kind, and that the trust has not been taxed on under section 223(2), are often a return of the unit holder's own money. Section 223(4) switches off the "same nature" rule for the specified sum, which is instead chargeable under the head "Income from other sources" (section 92(2)(k)).

The specified sum for a unit in a tax year is A - B - C, taken as zero if B plus C is more than A, where:

• A is the total of such distributions on that unit to you, in the year and in earlier years, and also to any earlier holder of that unit.
• B is the amount at which the trust issued the unit.
• C is the amount already charged to tax under this clause in earlier years.

Amounts that are neither Schedule V Sl. 3 or 4 income nor taxed under section 92(2)(k) or 223(2) reduce the unit's cost of acquisition (section 72(4)). That is how the law avoids taxing the same money twice.

Worked example 1: a REIT distribution to a resident unit holder

Meena, a resident individual, holds REIT units. In tax year 2026-27 the REIT distributes Rs 1,00,000 to her. Form 77 shows the nature of the distribution. Assumption: the units were issued above all the distributions Meena has ever received on them, so no specified sum arises.

Step	Component	Amount (Rs)
1	SPV interest (Sch V Sl. 3)	40,000
2	REIT direct rent (Sch V Sl. 4)	30,000
3	Other sums (return of capital)	30,000
4	Total distributed (1 + 2 + 3)	1,00,000
5	Taxable in the year under 223(3): 40,000 + 30,000	70,000
6	TDS at 10% of 70,000 (nil threshold)	7,000
7	Reduces the cost of acquisition under 72(4)	30,000
8	Net cash Meena receives (4 - 6)	93,000

Meena reports Rs 70,000 as income and takes credit for Rs 7,000 of TDS. Her tax on the Rs 70,000 depends on her slab and other income. The Rs 30,000 is not taxed now, but her cost of acquisition falls by that amount.

Worked example 2: the specified sum over several years

Ravi subscribed to an InvIT unit at the issue price of Rs 100 per unit. Every year the trust pays him other sums (not Schedule V Sl. 3 or 4 income, and not taxed under section 223(2)). Assumption: Ravi is the first holder and no earlier unit holder received anything.

Tax year	Paid this year (Rs per unit)	A (cumulative)	B (issue price)	C (taxed earlier)	A - B - C	Taxable under 92(2)(k)
Year 1	30	30	100	0	-70	0
Year 2	50	80	100	0	-20	0
Year 3	40	120	100	0	20	20
Year 4	15	135	100	20	15	15

In years 1 and 2 the receipts are below the issue price, so there is no specified sum. In year 3 the total reaches Rs 120, which is Rs 20 above the issue price, so Rs 20 per unit is taxed. In year 4 the total is Rs 135, and Rs 20 has already been taxed, so only the new Rs 15 is taxed. If Ravi holds 1,000 units, the taxable amount in year 3 is Rs 20,000 and in year 4 Rs 15,000.

Worked example 3: selling the units

Ravi sells 1,000 listed REIT units in tax year 2026-27 after holding them for 18 months. The units are listed on a recognised stock exchange, so the 12-month test in section 2(101)(b) applies and the gain is long-term. Securities transaction tax (STT) is paid on the sale, so section 198 applies. Assumptions: resident individual, other income above the basic exemption, no indexation, and a cost of Rs 100 per unit.

Step	Item	Amount (Rs)
1	Original cost of 1,000 units at Rs 100	1,00,000
2	Less other sums received that were not taxed (72(4))	20,000
3	Cost of acquisition for the capital gain (1 - 2)	80,000
4	Sale price	2,50,000
5	Long-term capital gain (4 - 3)	1,70,000
6	Gain above Rs 1,25,000 (5 - 1,25,000)	45,000
7	Tax at 12.5% of 45,000 (section 198(2)(a))	5,625

Had the same units been held for 12 months or less, the gain would be short-term and taxed at 20% under section 196(1) (STT paid). For the full rules, see our guide to short-term vs long-term capital gains under the Income Tax Act 2025.

Does the SPV's section 200 choice affect a unit holder's dividend exemption?

Not any more. Schedule V Sl. No. 5 used to deny a unit holder exemption on the part of a distribution that was SPV dividend where the SPV had opted for the 22% regime in section 200. That limb, clause (b), was omitted by Act No. 21 of 2026 with effect from 1 April 2026, so the SPV's choice no longer changes the unit holder's position on dividend. The denial still applies to the proportion that is SPV interest and to REIT direct rent. The TDS no-deduction entries in section 393 still mention an SPV that has not exercised the section 200 option, so check the current text of those entries before treating any distribution as free of TDS.

Real-life scenarios

Scenario 1: Meena misses the nature split. Meena sees a bank credit of Rs 93,000 and assumes it is all dividend-like income. Her Form 77 splits it into interest, rent and other sums. If she reports only the cash received, she misses the Rs 30,000 reduction in cost and may also overstate or understate her income. She fixes it by reading Form 77 first and reporting by nature.

Scenario 2: Ravi inherits units mid-way. Ravi's father held InvIT units issued at Rs 100 and received Rs 90 per unit over the years. Ravi holds the units later and receives Rs 20 more. Under the formula in section 92(2)(k), A includes what earlier holders of that unit received, so the total is Rs 110 against a Rs 100 issue price. The specified sum is Rs 10, not zero. Ravi should ask for the history, because the earlier holder's receipts count.

Common mistakes

• Treating the whole distribution as exempt or as dividend. The nature carries over under section 223(1). Only Form 77 shows the split.
• Ignoring the cost reduction. Receipts within the issue price are not taxed now, but they reduce cost under section 72(4) and raise the gain on sale.
• Forgetting earlier holders in the specified sum. Term A counts distributions to any earlier holder of the same unit.
• Missing the 10% TDS credit. The 10% deducted under section 393(1) Sl. No. 4(ii) should be matched against the statement and the tax credit statement before filing.
• Overlooking SPV dividend. Schedule V Sl. No. 3 covers SPV dividend as well as interest, and it carries the same 10% TDS for residents.

Quick reference

Item	Rule	Reference
Who is a business trust	Registered REIT or InvIT	Section 2(21)
Trust's tax on its total income	Maximum marginal rate, subject to 196, 197, 198	Section 223(2)
Distribution nature	Same as received by the trust	Section 223(1)
SPV interest, SPV dividend and REIT direct rent	Deemed income of unit holder	Section 223(3)
TDS, resident unit holder	10%, nil threshold	Section 393(1), Sl. No. 4(ii)
Statement to authority (Form 76)	15 June after the tax year	Rule 145(2)
Statement to unit holder (Form 77)	30 June after the tax year	Rule 145(2)
LTCG on units, STT paid	12.5% above Rs 1,25,000	Section 198(2)
STCG on units, STT paid	20%	Section 196(1)

Where this is in the Act

• Section 2(21): definition of business trust
• Section 223: tax on income of unit holder and business trust
• Section 92(2)(k): specified sum received by a unit holder
• Section 72(4): cost of acquisition reduced by other sums received
• Sections 196, 197, 198: capital gains rates, including for units of a business trust
• Section 393(1), Table Sl. No. 4(ii): TDS on distributed income; section 393(2), Sl. Nos. 6 and 7: non-residents
• Schedule V, Sl. Nos. 3, 4, 5 and Notes 2, 3: exemptions in the trust's hands
• Rule 145: statements under section 223(5) in Forms 76 and 77

For CA firms

A client with REIT or InvIT units can have three tracks running at once: income by nature, a falling cost base, and a possible specified sum. Finexo's practice management software helps you keep the Form 77 follow-ups and the 30 June reminders on one client checklist. It does not calculate tax or file returns for you.

This article is information, not tax advice. Check the current text of the Act and Rules, and your client's facts, before acting.