The Taxation and Other Laws (Amendment) Bill, 2026, has made dividend income from REITs and InvITs tax-free for unit holders. To keep the move revenue-neutral, the government raised the corporate tax surcharge for underlying Special Purpose Vehicles (SPVs) to 25%. Investors now face a trade-off where personal tax relief may be balanced by the potential for lower cash distributions due to higher tax costs at the operating level.
The landscape for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) has shifted following the passage of the Taxation and Other Laws (Amendment) Bill, 2026, on August 6, 2026. The government has introduced a significant tax change designed to simplify how investors are taxed, but this comes with a balancing act that may affect the distributable cash available for these trusts.
Under the new rules, dividend income received by unit holders from REITs and InvITs will be tax-exempt. This applies even if the underlying Special Purpose Vehicles (SPVs)—the operating companies that generate the rental or infrastructure income—choose to follow the new concessional tax regime. For many individual investors, this is a positive development, as it removes a layer of tax on the income they receive from their investments.
However, to maintain a revenue-neutral outcome—meaning the government aims to collect roughly the same total amount of tax as before—the bill has increased the corporate tax surcharge for SPVs that opt for the new concessional tax regime. This surcharge has been raised from 10% to 25%. As a result, the effective corporate tax rate for these SPVs is expected to climb to approximately 28.6%.
This creates a potential dilemma for investors. While the tax burden on the money reaching their pockets may be lower, the tax burden on the operating companies themselves has increased. Since REITs and InvITs are required to distribute a major portion of their cash flow to unit holders, a higher tax bill at the SPV level could leave less cash available to be paid out as dividends. Whether the benefit of tax-free dividends for investors will be offset by lower dividend payouts will depend on how each trust manages its cash flows under the new tax structure.
Operational complexity adds another layer for investors to consider. The distributions from these trusts often include both dividend and interest components. While the new bill makes the dividend portion tax-exempt, the interest portion remains subject to different tax rules. Investors may need to pay closer attention to how their distributions are classified by the trusts to understand the actual tax impact on their returns.
The coming months will be a period of adjustment as trusts assess the impact of these changes on their financial planning and distribution policies. The key monitorable for investors will be management commentary in upcoming quarterly results, specifically regarding how the higher surcharge at the SPV level impacts their ability to maintain previous dividend payout levels. Those invested in REITs and InvITs may want to track updates from their respective trusts to understand the specific implications for their investment income.