The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha, makes REIT and InvIT dividend income tax-exempt regardless of the SPV's tax regime. While this removes previous tax hurdles for unitholders, investors should note that only the 'dividend' portion is tax-free. Other distributions like interest and rental income remain taxable, requiring careful reporting in tax filings.
On August 6, 2026, the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, introducing significant changes to how income from Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) is taxed. The core update is that dividend income distributed to unitholders will now be tax-exempt, regardless of whether the underlying Special Purpose Vehicle (SPV) chooses the old corporate tax regime or the new, concessional regime.
Previously, investors could only claim a tax-free status for dividends if the SPV adhered to the older tax structure. This created a rigid system where tax planning at the SPV level directly influenced the post-tax returns of the investor. By making this exemption regime-neutral, the new legislation aims to provide more flexibility to these trusts and streamline the investor experience.
The Trade-off for SPVs
While the amendment offers a clearer path for unitholders, it comes with a change for the companies managing these trusts. SPVs that opt for the newer, concessional corporate tax regime will now be subject to a higher surcharge of 25%, increased from the previous 10%. This adjustment effectively shifts a portion of the tax burden from the investor level to the trust or SPV level. Industry analysts are monitoring how this change will influence the cash flow available for distribution to unitholders, as the higher surcharge could impact the net earnings of some infrastructure-heavy SPVs.
Why Investors Must Check Distribution Statements
Investors should not assume that every rupee received from a REIT or InvIT is tax-free. Distributions are typically a mix of different income streams, and the new tax exemption applies strictly to the 'dividend' component. Other parts of the payout often include interest income and rental income, which remain taxable at the investor's applicable slab rate. Additionally, capital repayments are not taxed upon receipt but may affect the calculation of capital gains when units are eventually sold.
To avoid potential tax notices or audit issues, investors are encouraged to refer to their Form 64B or specific distribution statements provided by the trust. These documents break down the total payout into its taxable and non-taxable components, which is essential for accurate income tax reporting. Relying on a blanket assumption that all distributions are tax-free could lead to significant underreporting of taxable income.
Market Context and Next Steps
The amendment arrives as India's listed REIT market continues to scale. By the end of FY 2025-26, cumulative distributions across the sector exceeded Rs 8,900 crore, reflecting the growing importance of these vehicles for income-seeking investors. As the market expands, the shift toward the new tax regime will likely be gradual, as SPVs must also manage the utilization of existing Minimum Alternate Tax (MAT) credits.
Currently, the Bill is awaiting passage in the Rajya Sabha and subsequent Presidential assent. Until these steps are completed and the law is notified, the previous tax framework remains in effect. Investors should watch for the final notification of the Bill and any subsequent guidelines issued by the tax authorities regarding the transition process for SPVs.