How REITs and InvITs Are Taxed in India — Complete Guide to Capital Gains, Dividends, and Interest for AY 2026-27

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have become a popular way for Indian retail investors to earn regular income from real estate and infrastructure assets without buying physical property. With units listed on stock exchanges, you can invest in commercial office spaces, highways, power grids, and data centres through your regular demat account.

But when the distributions start flowing in, most investors discover that REIT and InvIT income isn't taxed like ordinary dividends or mutual fund returns. The income you receive is split into multiple components — interest, dividend, rental income, and sometimes return of capital — each taxed differently. Getting this wrong in your ITR can lead to mismatches with your Form 26AS and unnecessary tax notices.

This guide breaks down exactly how each type of REIT and InvIT income is taxed for AY 2026-27 (FY 2025-26), including the significant changes introduced by Budget 2024.

What Are REITs and InvITs?

REITs pool investor money to own and manage income-generating real estate — typically commercial office parks, shopping malls, and warehouses. In India, REITs like Embassy Office Parks, Mindspace Business Parks, and Brookfield India Real Estate Trust are listed on stock exchanges.

InvITs do the same for infrastructure assets — toll roads, power transmission lines, gas pipelines, and telecom towers. Listed InvITs include IndiGrid, IRB InvIT, and Powergrid Infrastructure Investment Trust.

Both are required to distribute a large portion of their income to unitholders, making them attractive for investors seeking regular cash flow. However, unlike mutual fund dividends where the character of income is straightforward, REIT and InvIT distributions are a blend of multiple income types.

Understanding the Components of REIT/InvIT Distributions

When a REIT or InvIT distributes income to you, the distribution is typically split into these components. You'll find this breakup in the distribution statement or your consolidated account statement:

The SPV is the entity that actually owns the asset (building, highway, etc.). The trust holds shares or interest in the SPV and passes through the income to you, the unitholder. Because each component originates differently at the SPV level, the tax treatment in your hands varies.

Taxation of Interest Income from REITs/InvITs

The interest component is the most common and often the largest part of REIT/InvIT distributions. This is interest that the SPV pays to the trust on inter-corporate loans, which then flows through to you.

Tax treatment: Fully taxable at your applicable income tax slab rate. Report it under "Income from Other Sources" in your ITR.

TDS: The trust deducts TDS at 10% under Section 194LBA before distributing the interest component to you. If your total income is below the taxable threshold, you can submit Form 15G/15H to the trust (via your depository participant) to avoid TDS — though in practice this is less common with REIT/InvIT investments.

Example: If Embassy REIT distributes ₹5.50 per unit and the interest component is ₹3.80 per unit, and you hold 500 units, your taxable interest income is ₹1,900 (500 × ₹3.80). TDS of ₹190 (10%) would already be deducted.

Taxation of Dividends from REITs/InvITs

This is where REIT/InvIT taxation gets nuanced. The tax treatment of the dividend component depends on which corporate tax regime the underlying SPV has chosen:

If the SPV pays tax at normal corporate rates (old regime): The dividend passed through to you is exempt from tax under Section 10(23FC) for InvITs or Section 10(23FCA) for REITs. You don't pay any tax on this component.

If the SPV opted for the concessional tax rate under Section 115BAA (22% + surcharge + cess): The dividend is not exempt and becomes taxable at your slab rate in your hands. TDS at 10% applies under Section 194LBA.

Most large REITs and InvITs have SPVs under both regimes, so part of your dividend may be exempt and part taxable. The trust's distribution statement will break this down for you.

How to check: Look at the "exempt dividend" and "taxable dividend" breakup in your distribution statement or the REIT/InvIT's investor presentation. The trust is required to provide this split.

Taxation of Rental Income (REITs Only)

Some REITs earn rental income directly (not through an SPV). This component is passed through to unitholders and is taxable at your slab rate as income from other sources.

TDS: 10% under Section 194LBA.

In practice, this component is relatively small compared to interest and dividend for most Indian REITs, but you'll still see it in your distribution breakup.

The Return of Capital Component

REIT and InvIT distributions sometimes include a "repayment of debt" or "other" component. This represents the SPV repaying borrowed capital to the trust, which then passes it to you.

Tax treatment: This is not immediately taxed as income. Instead, it reduces the cost of acquisition of your REIT/InvIT units. When you eventually sell the units, your capital gains will be higher because your adjusted cost is lower.

Example: You bought 1,000 units of a REIT at ₹320 per unit (total cost: ₹3,20,000). Over two years, you received ₹15 per unit as the "other/repayment" component (total: ₹15,000). Your adjusted cost of acquisition is now ₹3,05,000 (₹3,20,000 − ₹15,000). When you sell, capital gains are calculated on this reduced cost.

Important caveat: If the cumulative return of capital component exceeds your original cost of acquisition, the excess is taxable as "Income from Other Sources" in the year it exceeds the cost.

Capital Gains on Sale of REIT/InvIT Units

Since REIT and InvIT units are listed on stock exchanges, selling them triggers capital gains tax similar to listed shares and equity mutual funds. Budget 2024 made significant changes here.

Post-Budget 2024 Rules (Applicable for AY 2026-27)

The reduction in holding period from 36 months to 12 months is a major positive for REIT/InvIT investors. Earlier, you had to hold units for 3 years to qualify for long-term capital gains. Now, units held for just over 12 months qualify as long-term.

Capital Gains Calculation Example

Suppose you bought 500 units of Mindspace REIT at ₹330 per unit in January 2025 and sold them in March 2026 at ₹370 per unit. During this period, you received ₹8 per unit as return of capital.

• Original cost: 500 × ₹330 = ₹1,65,000
• Cost reduction (return of capital): 500 × ₹8 = ₹4,000
• Adjusted cost: ₹1,65,000 − ₹4,000 = ₹1,61,000
• Sale value: 500 × ₹370 = ₹1,85,000
• Capital gains: ₹1,85,000 − ₹1,61,000 = ₹24,000
• Holding period: ~14 months → Long-term
• LTCG tax: If you've not used up the ₹1.25 lakh exemption, the ₹24,000 is exempt. If you've already exhausted the exemption through equity/mutual fund gains, tax = ₹24,000 × 12.5% = ₹3,000.

TDS Summary for REIT/InvIT Income

All TDS deducted will reflect in your Form 26AS and Annual Information Statement (AIS). Verify the amounts before filing your ITR to avoid mismatches.

How to Report REIT/InvIT Income in Your ITR

Which ITR Form?

If you hold REIT or InvIT units, you cannot use ITR-1. You need to file ITR-2 (or ITR-3 if you have business income) because:

• Capital gains from sale of units require Schedule CG
• The multi-component distribution income needs proper classification
• Even if you only hold units and haven't sold them, the interest/dividend income reporting is better handled in ITR-2

Where to Report Each Component

Practical Filing Tips

1. Collect distribution statements: Download the component-wise breakup from the REIT/InvIT's investor relations page or your broker's tax P&L statement. Most brokers now provide this in a pre-formatted tax report.

2. Match with Form 26AS: The TDS on interest and taxable dividend should appear under Section 194LBA in your Form 26AS. If it doesn't, contact the trust's registrar before filing.

3. Track the return of capital component separately: Maintain a simple record of cumulative return-of-capital distributions for each REIT/InvIT holding. You'll need this to calculate the correct cost of acquisition when you sell.

4. Don't double-count: The total distribution you receive in your bank account is post-TDS. Make sure you're reporting the gross (pre-TDS) amount as income and separately claiming the TDS credit.

Common Mistakes to Avoid

Treating the entire distribution as dividend: This is the most frequent error. If you report the full distribution amount as dividend income, you'll pay excess tax on the interest component (which may have a different effective rate) and miss claiming exemption on the exempt dividend portion.

Forgetting to adjust cost of acquisition: When you sell REIT/InvIT units, using the original purchase price without reducing it by the return of capital component understates your capital gains. This mismatch can trigger a notice if the income tax department's records show a different cost basis.

Filing ITR-1 with REIT/InvIT income: ITR-1 doesn't have schedules for capital gains or the detailed breakup needed for trust distributions. If you've been filing ITR-1 and now hold REIT/InvIT units, switch to ITR-2.

Ignoring the LTCG exemption limit: The ₹1.25 lakh LTCG exemption applies across all your listed equity, equity mutual fund, and REIT/InvIT gains combined. If you also sold stocks or equity mutual funds during the year, your REIT capital gains may not be fully exempt. Plan your redemptions accordingly.

Key Takeaway

REIT and InvIT investing in India offers attractive yields, but the tax reporting requires more attention than stocks or mutual funds. The critical step is breaking down your distribution into its components — interest, taxable dividend, exempt dividend, rental income, and return of capital — and reporting each in the correct ITR schedule. Keep your distribution statements organized, reconcile with Form 26AS, and remember that after Budget 2024, the 12-month holding period for LTCG makes these instruments significantly more tax-efficient for medium-term investors. If your REIT/InvIT holdings are straightforward, a tool like 49Tax can help you classify each income component and ensure your ITR-2 is filed correctly.