REIT and InvIT Taxation From April 2026: Dividend Exemption vs TDS

Summary: The Income-tax Act, 2025, effective from 1 April 2026, retains the fundamental pass-through taxation framework for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Under section 223, income distributed by a business trust generally retains its original nature and proportion in the hands of unit holders. Consequently, interest received from special purpose vehicles (SPVs), rental income earned directly by a REIT, dividends, income already taxed at the trust level and capital repayments must be examined separately rather than treating the entire distribution as taxable or exempt. A significant change was introduced through section 5 of the Taxation and Other Laws (Amendment) Act, 2026, which omitted the condition in Schedule V, Table serial number 5, linking the unit holder’s dividend exemption to whether the underlying SPV had opted for the concessional corporate tax regime under section 200. With retrospective effect from 1 April 2026, qualifying SPV dividends distributed through a business trust are exempt in the hands of unit holders irrespective of that election. A separate amendment increased the surcharge applicable to specified domestic-company SPVs opting under sections 200 or 201 from 10% to 25%; this is not a dividend tax on individual investors.

Business Trust Distributions After 1 April 2026: What Actually Changed

Introduction: one distribution, two different tax answers

The new Income-tax Act preserved the basic pass-through regime for REITs and InvITs. An August 2026 amendment, however, changed the exemption for dividends distributed to unit holders. The corresponding TDS provision appears not to have been aligned, creating a practical question for investors.

A resident investor receives a statement showing ₹1 lakh distributed by a Real Estate Investment Trust (REIT). Of this, ₹20,000 is dividend income and ₹70,000 is interest and rent; the balance represents repayment of capital. The statement also reports ₹8,500 as tax deducted at source (TDS). How much belongs in taxable income? And why might tax have been deducted even though part of the dividend is exempt?

Those questions matter because a REIT or Infrastructure Investment Trust (InvIT) distribution is rarely one type of income. The amount credited to the bank may contain interest from a special purpose vehicle (SPV), rent earned directly by a REIT, dividends and capital repayments. Each component follows a different rule. Treating the whole receipt as interest, or the whole receipt as exempt dividend, can distort the return.

The Income-tax Act, 2025 applies from 1 April 2026 to Tax Year 2026–27. FY 2025–26 remains subject to the Income-tax Act, 1961 for AY 2026–27. The new Act renumbered familiar provisions, but a further law enacted in August 2026 changed the dividend result with effect from 1 April 2026. Its interaction with an unchanged TDS exception is the main practical issue addressed here. [1–3]

The pass-through rules survived the new Act

Business trusts hold real estate or infrastructure assets. Section 223 of the 2025 Act carries forward the section 115UA rule: income distributed to unit holders retains its nature and proportion.

Schedule V, Table serial numbers 3 and 4, exempts specified SPV interest and dividend income, and rent from real estate owned directly by a REIT, at the trust level. The corresponding interest and rent are generally taxable when distributed to unit holders. Other trust income, including some capital gains, can be taxed at the trust level. Pass-through is therefore a classification mechanism, not a blanket exemption for distributions. [2]

The change that matters: the dividend condition was removed

Previously, Schedule V, Table serial number 5, denied the unit holder’s dividend exemption where the underlying SPV had opted for the concessional corporate tax regime under section 200 (the successor to section 115BAA). Thus, an SPV’s election affected the investor’s liability.

Section 5 of the Taxation and Other Laws (Amendment) Act, 2026 (Act 21 of 2026) omits clause (b) in column D of Schedule V, Table serial number 5. The Act received assent on 17 August 2026 and, subject to expressly stated exceptions, is deemed effective from 1 April 2026. With the exclusion removed, dividend income passed through from an SPV is exempt for the unit holder irrespective of the SPV’s section 200 election. The trust’s exemption under Table serial number 3 was untouched. [1–2]

A companion amendment under section 6 of the 2026 amending Act raises the surcharge on income-tax payable by specified domestic-company SPVs opting under section 200 or 201 from 10% to 25%. This is a surcharge on the SPV’s tax, not a 25% dividend tax imposed on an individual unit holder. [1]

The Department’s PDF marked “as amended by Finance Act, 2026” still shows the old clause. Read it with the later August Act. [1–2]

The second issue: the TDS exception still refers to section 200

Section 393(1), resident-payment Table serial number 4(ii), ordinarily provides for 10% TDS on specified distributions of business trusts, without a monetary threshold. Section 393(4), no-deduction Table serial number 5, still excludes SPV dividend income from withholding only where the SPV has not exercised the section 200 option. The August 2026 Act amended Schedule V but did not correspondingly amend this TDS exception. [1, 4]

For section 200 SPV dividends, the income is exempt but does not satisfy the express no-TDS condition. This apparent statutory mismatch has not been resolved by a verified CBDT clarification or judicial ruling. On a literal reading, the trust may withhold 10% even on this exempt dividend.

Where TDS is deposited against the investor’s PAN, credit or refund may be claimed subject to return processing and applicable rules. Section 431 addresses refunds of excess tax; verify the Tax Year 2026–27 utility before filing. [2, 4]

What each distribution component means for an individual

SPV interest: Taxable to the unit holder, normally under income from other sources.

Direct REIT rental income: Taxable to the unit holder under the applicable income-head rules.

SPV dividend: Exempt for the unit holder under amended Schedule V, Table serial number 5, regardless of the section 200 election. The election can still matter for TDS under section 393(4).

Other income taxed within the trust: Generally exempt when distributed to unit holders to the extent covered by Schedule V, Table serial number 5.

Capital repayment: Section 92(2)(k) can tax prescribed excess cumulative distributions; otherwise, repayment may reduce acquisition cost under section 72(4). [2]

Worked example: ₹70,000 taxable, potentially ₹8,500 withheld

Consider an illustrative resident REIT investor in Tax Year 2026–27:

Assume the units’ issue price was ₹2 lakh and no earlier repayments occurred. The ₹10,000 repayment affects acquisition cost, not current taxable income.

The corrected taxable pass-through amount is ₹70,000, not ₹85,000. But the illustrative TDS remains ₹8,500: ₹7,000 on taxable interest and rent and ₹1,500 potentially deducted on an exempt dividend. Tax liability and any refund depend on the full return. These are constructed figures, not client data.

Forms and the return-filing check

Under the old Act, section 194LBA dealt with the withholding. Section 393 now performs that function. Trust-level Form 64A becomes Form 76, and the individual unit-holder statement Form 64B becomes Form 77 under Rule 145 of the Income-tax Rules, 2026. The trust files Form 76 by 15 June and provides Form 77 by 30 June of the following financial year (June 2027 for Tax Year 2026–27). Individuals do not file Form 77. [4–5]

When preparing the return, reconcile Form 77 with Schedule PTI, the appropriate taxable- and exempt-income schedules, and TDS appearing in Form 26AS or the relevant tax records. Separate the exempt dividend from the taxable interest and rent. For TDS on exempt dividends, retain records and check the credit claim; do not declare the exempt dividend taxable merely to match TDS. Forms 77 and 15G/15H do not fix this mismatch. [4–6]

The separate section 112A correction

A different change should not be confused with the dividend amendment. Section 26 of the Finance Act, 2025 added section 112A to the exceptions in old section 115UA(2), effective 1 April 2026. Its counterpart, section 223(2), now refers to section 198 of the 2025 Act. Subject to qualifying asset and securities transaction tax conditions, section 198 can apply a 12.5% rate to specified long-term capital gains above ₹1,25,000 at the trust level, rather than taxing those gains at the general maximum marginal rate. This is not a unit-holder exemption for distributions. [2, 7]

Conclusion: classify first, then reconcile the tax

From 1 April 2026, business trust taxation did not become a completely new regime. The pass-through approach remains, and the individual still needs to separate interest, rent, dividends, income taxed within the trust and capital repayment. What changed materially for an investor is the removal of the condition that linked SPV dividend exemption to the SPV’s section 200 choice. The associated surcharge change operates at SPV level, while the section 112A correction is a separate trust-level capital-gains provision.

The unresolved practical point is withholding. Section 393(4) still carries the section 200 condition even though the dividend exemption no longer does. A resident investor could therefore receive exempt dividend income with TDS deducted against it. This does not make the dividend taxable again, nor does it guarantee an immediate refund without a return-level reconciliation.

Before filing, obtain Form 77, check the income split and SPV election disclosure, compare TDS against Form 26AS, account for earlier capital repayments and preserve the supporting working papers. Professionals should also verify whether CBDT issues any subsequent clarification or corrective amendment. This approach protects the return from a simple but costly error: treating tax deducted at source as proof that the underlying income is taxable.

References — official government sources only

• Taxation and Other Laws (Amendment) Act, 2026 (Act 21 of 2026), sections 1, 5 and 6; Gazette of India, 17 August 2026: Official source
• Income-tax Act, 2025 (PDF consolidated through Finance Act, 2026), sections 72, 92, 198, 200, 223, 393, 431 and Schedule V. Read alongside source 1 for the August 2026 amendment: Official source
• President of India, record of assent to the Taxation and Other Laws (Amendment) Bill, 2026: Official source
• Income Tax Department, section 393, resident distribution withholding and no-deduction exception: Official source
• Income Tax Department, Guidance Note on Form 77, under Income-tax Rules, 2026: Official source
• Income Tax Department, Schedule PTI guidance: Official source
• Finance Act, 2025, section 26 (amendment to section 115UA): Official source