REIT, InvIT dividend tax relief may boost investor returns; know who benefits and what remains taxable

The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on 6 August, proposes to extend the dividend exemption to REIT and InvIT unit holders even when the underlying SPV opts for the new tax regime.

If enacted, the change could improve post-tax returns for investors, particularly those in higher tax brackets, while giving them greater certainty over the tax treatment of their REIT and InvIT investments.

Under the current rules, the dividend component of a REIT or InvIT distribution is exempt when the underlying SPV is taxed under the old corporate tax regime. However, if the SPV chooses the new concessional regime, the dividend becomes taxable in the hands of investors at their applicable slab rates.

The proposed amendment seeks to remove this condition. If enacted, dividends received by unit holders would be exempt irrespective of the tax regime selected by the underlying SPV.

REIT and InvIT investors could save thousands on dividend tax

“This is a welcome move, particularly for HNI investors, as it is expected to improve the post-tax returns from investments in REITs and InvITs,” said Chintak Shah, associate director, Anand Rathi Wealth.

The tax saving could be meaningful for investors in higher tax brackets. According to CA Parag Jain, tax head at 1 Finance, an investor in the 30% tax bracket receiving ₹75,000 as dividend from a REIT whose SPV has opted for the new regime currently pays approximately ₹23,400 in tax. If the Bill becomes law, that liability would fall to nil.

The proposed change also addresses what Jain described as a structural problem in the existing framework. Investors have no control over the tax regime selected by an underlying SPV, but the decision can affect the tax they pay on their REIT or InvIT dividend income.

The change could therefore make post-tax returns more predictable and remove the risk that an SPV changing its tax regime could alter the tax treatment of an investor's dividend income.

Shah said the amendment would also reduce the difference in post-tax returns between SPVs choosing the new tax regime and those continuing with the existing regime. This could give SPVs greater flexibility in choosing the tax structure without adversely affecting investors' post-tax returns.

Not all REIT and InvIT payouts will be tax-free

The proposed exemption does not mean that an investor's entire REIT or InvIT distribution will become tax-free.

Jain said REIT and InvIT distributions can have multiple components, including dividend, interest, rental income and capital-related components, with each receiving different tax treatment. Under the proposed change, only the dividend component from an SPV opting for the new tax regime would get the additional exemption.

Interest income would continue to be taxable at the investor's applicable slab rate. Rental income would continue to have its existing tax treatment, while capital gains arising from the sale of REIT or InvIT units would remain taxable.

For example, if an investor receives ₹1 lakh in total distributions and ₹60,000 is classified as interest while ₹40,000 is dividend, the proposed exemption would apply only to the ₹40,000 dividend. The ₹60,000 interest income would remain taxable.

This distinction is important because investors often look at the headline distribution yield without checking its underlying composition. Jain advised investors to examine distribution notices and review the breakup of payouts over the previous two to three years before investing.

TDS is another issue investors should keep in mind. Jain said tax is deducted at source on both interest and dividend components for resident unit holders. Even if the dividend becomes exempt, the deduction at source does not automatically disappear.

“This means TDS deducted can be recovered,” Jain said, explaining that investors would need to claim the TDS as a tax credit while filing their income tax return and seek a refund if the amount deducted exceeds their actual tax liability.

Investors should also not confuse the proposed dividend relief with a tax exemption on gains from selling REIT or InvIT units. Jain said capital gains taxation would remain unchanged.

The timing of the investment decision is also important. Jain advised investors to wait for Presidential assent before treating the proposed dividend exemption as an enacted tax benefit.