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This article is written by Debarpita Pande, a student from Maharashtra National Law University, Nagpur. In this article, the author explains the budget of 2020 with special reference to REIT.


Real Estate Investment Trusts (REITs) have been a very popular investment vehicle for the investors lately. Though they were introduced in 2014 in India, the first REIT issue took place in April 2019 from the Embassy group.

Taxation of REITs – Then and now

Till this budget 2020, the REITs were enjoying incentives from the Government to develop a new investment asset class. However, the 2020 budget has posed major roadblocks in their smooth run. 

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REITs are allowed to invest in two ways in Indian legal landscape. They can invest either individually or through special purpose vehicles (SPVs). Also, REITs raise funds from unitholders to pool in assets. 

Taxation structure before Budget 2020

Till the 2020 Union budget, these trusts had a single level of tax. This means that tax was deducted at source or the taxes paid by the SPVs. This means that till the present budget, the taxes on dividends paid by the REITs were exempt at the following levels:

  1. Subject to special conditions, the asset holding SPVs were exempted from paying taxes on dividends distributed to REITs;
  2. Similarly, the REITs were also exempted from paying taxes on dividends earned by SPVs;
  3. Most importantly, from an investors’ point of view, the unitholders were also exempted from paying taxes on the dividends earned from REITs.

This model was akin to the global business trusts. However, this Union budget announced to levy taxes on the dividends distributed by the REITs in the hands of the unitholders, thus deviating from the practice followed by global business trusts.

Taxation structure after Budget 2020

The Budget proposed to amend section 10 (23FD) of the Income Tax Act, 1961, which allows tax exemption on dividends received by a unitholder from a business trust. Now, this was amended so that the dividend becomes taxable at the hands of the unitholders. However, the dividend received by a business from a business trust would not be taxed in the hands of the trust. It implies that this provision will deem to consider the dividend as an income in the hands of the unitholders.

How the changes in this budget may affect REITs?

When the burden of paying dividend distribution tax shifted to the hands of the investors, it made the REITs a less attractive investment option. This recent budget proposed to abolish dividend distribution tax at company’s end and made the individual investors liable to pay taxes on the received dividends according to their respective applicable rates. This move is less attractive for the investors from the taxation perspective.

Dividend Distribution Tax and the Investors

While the incidence of dividend distribution tax shifted from companies to investors, the section 80M of the Income Tax Act, 1961 was also proposed to be amended in the present budget. Section 80M of the Income Tax Act, 1961 is reintroduced so that the section will be used to deduct the dividends received from the domestic company on further distributions of dividends by the domestic companies.

Thus this amendment has done away with the exemption given to the investors who earned less than 10 lakhs as dividends. It meant that investors did not have to pay tax on the dividends received by him if the amount did not surpass 10 lakhs. However, this amendment does not recognise this exemption. This means that investors have to pay tax at the rate of 10% irrespective of the dividend amount received by them. While this amendment was proposed, the Finance Minister said that these changes will ‘increase the attractiveness of the Indian equity market and to provide relief to a large class of investors’. However, shifting the burden of DDT to the investors will be counterproductive.

This move of shifting the burden of dividend distribution taxes to the investors conflicts with the government’s efforts for encouraging REITs which in turn provides for tax stability to long-term infrastructure investors.

There are a number of Indian promoters who follows a shareholding pattern of that of a trust. This amendment may directly hit those promoters. The Indian promoters who receive dividends from domestic companies, will be taxed at the rate of 42.74% which is higher than the previous rate. On the other side, the investors who are non-residents, may enjoy lower tax rates as stipulated in the treaties in force.

This rate of tax on resident investors is higher than those of tax-efficient jurisdictions where the rate of tax ranges in between 5% to 15%. This anomaly between the resident and non-resident investors may dampen the interests of the Indian investors as those promoters holding shares through trusts would be adversely impacted.

One of the major grey areas of this new law regarding dividend distribution tax is that when an Indian Company receives a dividend from its foreign subsidiary. Before this, the Indian companies who were receiving dividends from foreign companies, were subjected to 15% tax when they distributed dividends to shareholders. Now, this amendment allows deduction in cases of dividends received from domestic company only on further distributions. No provision is there for cases where dividends are received by the domestic companies from their foreign subsidiaries. This results in extra drain of money in form of taxes and eventually reducing the profitability.

Impact of Waiver of Dividend Distribution tax on REITs

This provision in the Budget 2020 has a detrimental effect on REITs especially. According to SEBI (Real Estate Investment Trusts) Regulations, 2014, the REITs are mandated to pay out ‘90% of net distributable cash flows as dividends’ to unitholders. They are not allowed to hold on to surplus income for their growth of portfolio which are on the other hand allowed for the listed companies. Now, when these dividends are taxed at the hands of the investors, it surely reduces the yield for them and finally making them less attractive.

This move has been receiving a lot of criticisms. A renowned Partner and Leader of PwC, (see here) said that changes in DDT is an overall positive change which can prove to be beneficial for small shareholders and MNCs, however “one-piece which needs to be relooked at is the increase of tax for InviTs and REITs, especially since there was a separate carve-out from DDT to these players under the existing tax regime”.

As mentioned earlier, the dividends received by the REITs from the investee company were earlier tax exempted. The unitholders of those REITs are also not taxed. So when the tax exemption is withdrawn, it results in lesser yield for the unitholders. This move by the Government might prove to be detrimental when the country is in need for long term funds for development of infrastructure. If these exemptions still existed, then it would have likely attracted investors because they usually prefer to invest in long term projects only when there is proper consistency of policy decisions. 

This move has also been well received by some. According to Kamal Singal, MD and CEO, Arvind Smart Spaces says that this waiver of dividend distribution tax and total exemption on income incurred by the sovereign funds in infrastructure will benefit and increase funding and growth in infrastructure sectors. However, he also recognises the ill effects of shifting the onus to the investors which in turn might dissuade them from investing in these sectors.

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Effect of this move on Government projects and policies

The Government move to tax dividends in the hands of the unitholders may backfire its own policies and projects. This will jeopardise the fund-raising plans of developers who intended to monetise assets through REITs. REITs are such instruments through which funds are raised from the investors after pooling in assets and taxing the dividends given by such trusts in the hands of the investors can prove to be counterproductive.

In early February group of industrialists planned to approach the Finance Ministry regarding this change in the tax regime (see here). The group said that this uncertainty in the tax regime might hurt the investment attitude of the foreign investors. According to them, this move to shift the burden on investors will jeopardise the plan of raising about 100 billion USD through REITs and INVITs.

These changes will also impact Government’s plans to list some INVITs There are large Government-run infrastructure companies like National Highway Authority (NHAI), Power Trading Corporation, PowerGrid Corporation which may get affected by this move as they were planning to monetise their roads and transmission assets through INVITs.

Laws and guidelines for REITs were introduced long before in 2014. However, India saw its first REIT as late as April 2019. Even after getting introduced in 2014, it took around two years to set off properly after the Finance Bill of 2016. This was due to the fact that the then Finance Bill of 2016 made the local tax framework consonant with the global tax framework with a single level of taxation. So, when India deviates from this global framework, the entire stimulus for REITs will dampen.

Indian economy is presently capital starved. REITs is one of the major instruments to pull in capital but this opportunity can be lost in the darkness of the unstable taxation regime. This present budget will fail to provide any relief to the existing investors. This is not only hurting the present but also may continue to hurt in the future. 

India REIT and INVIT market has managed to garner interest of some of the largest global institutional investors, pension funds as well as sovereign wealth funds. Big diverse entities like GIC Private Limited of Singapore, Blackstone Group LP, Brookfield Asset Management Inc., Canada Pension Plan Investment Board (CPPIB), and The Ontario Municipal Employees Retirement System (OMERS) have also shown interest in the Indian REIT markets either as significant investors or as sponsors. Recently, the sovereign wealth fund Abu Dhabi Investment Authority expressed interest and has been involved with Reliance Jio for its fibre to home assets which has been created into an INVIT At the same time, this budget may impact their investments with a long term view of around 10 to 15 years eventually hurting their sentiments and reliance on the Indian market. Investments are always made with a certain tax implication in mind and an unstable taxation structure is never a lucrative option for an investor. Investors tend to lose interest in that market leading to capital exportation with higher overseas issuances. In this scenario, the Government will have to bear a loss of securities transaction tax and other related taxes imposed on trading on units and these will cumulatively affect the Government exchequer. This entire phenomenon may lead to a mess in the Global Depository Receipt (GDR).


India’s second REIT, the Mindspace REIT has hit a roadblock due to this sudden change in the budget. This was supposed to raise Rs. ₹1,000 crore by the selling of new shares but has now become contingent on the revocation of this move by the Government. It has increased the apprehension of making the REITs less attractive to the investors.

The Finance Minister introduced this exemption to bypass the cascading effect of the taxes. This clarifies the stance of removing dividend distribution tax on direct equities however, it becomes unclear as to why it has not been explicitly removed from the pass-through instruments like REITs, INVITs or mutual funds. If this is not given immediate attention, then it might get crippled under the burden of cascading effect of taxes. While mutual funds have gained some popularity in India, REITs are too young to be crippled under this cascading effect of taxes. 

Lastly, REITs have the potential to single-handedly fortify the Indian real estate sector. If this vital change is not rolled back then the dilapidated condition of the Indian real estate sector may overpower their potential of being the game-changer. To ensure an early recovery of the real estate sector in the country and to inject a significant boost in the economy, this issue should be addressed with immediate effect.


  1. Aman Kapadia, ‘Budget 2020: InvITs, REITs Less Lucrative as Unitholders to Pay Tax on Dividends’ Bloomberg Quint (4 February 2020) <> accessed 11 March 2020.
  2. ‘No longer taxing: Abolition of DDT and its potential impact on Indian promoters’ Financial Express (4 February 2020) <> accessed 9 March 2020.
  3. Lalatendu Mishra, ‘Taxing investor on dividends will hurt REIT, InvIT funding’ The Hindu (Mumbai, 3 February 2020) <> accessed 11 March 2020.
  4. Vikas Vasal, ‘Taxation of dividends, back to classical system’ (Livemint, 5 march 2020) <> accessed 11 March 2020.
  5. Aarati Krishnan, ‘Dividend tax change: Who gains, who loses’ The Hindu Businesslline (7 February 2020) <> accessed 13 March 2020.
  6. Cyril Amarchand Mangaldas, ‘Dividend Distribution Tax Abolishment: Here’s Something Lost in Translation, Bloomberg Quint (22 February 2020) <> accessed 13 March 2020.
  7. Kailash Babar, ‘Global funds seek review of dividend tax on REITs, InvITs’ The Economic Times (6 February 2020) <> accessed 13 March 2020.
  8. ‘Govt proposal on DDT to adversely impact fund raising plans of NHAI, PowerGrid’ Financial Express (11 February, 2020) <> accessed 11 March 2020.
  9. Sobia Khan, ‘Proposed dividend distribution tax on InvITs, REITs may hit six planned trustsThe Economic Times (3 March 2020) <> accessed 11 March 2020.
  10. Bidya Sapam & Swaraj Singh Dhanjal, ‘Mindspace REIT hits a roadblock’ (Livemint, 13 Feb 2020) <> accessed March 11, 2020.

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