The ‘Concept of Business Trust in India’ was introduced vide the Finance Act’2014. The business trusts operate as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). At present, there are only InvITs registered in India, the first REIT is yet to pave its way. Practically the concept was implemented in the Financial Year 2017-18 when the InvITs went public in India.
The income tax return filing season is on its peak. Many taxpayers are underway to file their Income Tax Returns. The people have invested in the units of business trusts on which they have received the returns in the Financial Year 2017-18. The last date to file the return for the F.Y 2017-18 is around the corner. It is for the first time for many taxpayers who are dealing with such income in their Income Tax Return. We have discussed in this blog how the unitholders have to deal with the income received from business trusts while filing their income tax return.
The income of unitholders of Business Trust can be categorized into two parts.
1. Tax on Income Distributed by Business Trust
There is special taxation regime for taxability of income distributed by such business trust in the hands of the unitholders. The income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unitholders, as it had been received by, or accrued to the business trust.
The person distributing the income on behalf of the business trust is required to furnish the statement of income distributed to the unitholder in Form No. 64B by the 30th June.
Example, Mr. Arun, a resident individual, has received the following ‘Form 64B – Statement of income distributed by a business trust to the unitholders’ for the Financial Year 2017-18.
| S.No. | Amount Distributed | Date of Distribution | Amount of Income in the nature of interest referred to in Section 10(23FC) | Amount of Income in the nature of renting or leasing referred to in Section 10(23FCA) | Amount of Income in the nature of Dividend referred to in Section 115-O | Amount of Other Income |
| 1 | 50,000 | 25/10/2017 | 30,000 | – | – | 20,000 |
| 2 | 75,000 | 16/11/2017 | – | 25,000 | 27,000 | 23,000 |
Let’s see how taxability of each of such income will be determined in the hands of Mr. Arun.
Income in the nature of Interest
The income in the nature of interest referred to in subclause (a) of Section 10(23FC) is chargeable to tax in the hands of the unitholders. If the unitholder is non-resident the rate of tax on such income is 5% and for resident unitholders, it is chargeable to tax at slab rates.
This income is exempt in the hands of the business trust. This interest received or receivable from a special purpose vehicle by the business trust is accorded a pass-through treatment and is taxable directly in the hands of the unitholders. The business trust is liable to deduct TDS on this interest income at the rate of 10% in the case of a resident unit holder and 5% in the case of Non-resident unitholders.
Example, Mr. Arun has to include the income of Rs. 30,000 distributed by the business trust on 25/10/2017 as an interest income in his Income Tax Return.
Rental Income
The rental income referred to in Section 10(23FCA) is taxable income in the hands of the unitholders.
Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in the hands of the business trust. This income is chargeable to tax in the hands of the unitholders as rental income. The REIT is liable to deduct TDS on such distributed income at the rate of 10% for resident unitholders and at the rates in force for non-resident unitholders.
Example, Mr. Arun has to show the income of Rs. 25,000 distributed on 16/11/2017 by the business trust as rental income in his Income Tax Return.
Dividend Income
This dividend component of the income distributed by the business trust is exempt in the hands of the unit holder. The business trust is also provided an exemption in respect of such income.
Example, The income of Rs. 27,000 received by Mr. Arun on 27/10/2017 in the nature of Dividend referred to in Section 115-O is exempt in his hands.
Any Other Income
Any distributed income, referred to in section 115UA, received by a unitholder from the business trust is exempt in the hands of the unit holder as per Section 10(23FD)
Example, The income of Rs. 20,000 received on 25/10/2017 and Rs. 23,000 received on 16/11/2017 is exempt in the hands of Mr. Arun.
2. Tax on Income on Sale of Units
The profit from the sale of the units of the business trust is chargeable to tax under the head capital gains. The tax treatment will differ for the Short-term capital gains and long-term Capital gains. The period of holding of units of the business trust to qualify as a long-term capital asset is more than 36 months.
Short-Term Capital Gain
The short-term capital gains on which STT is paid is chargeable to tax at the rate of 15% as per section 111A. The deductions under Chapter VI-A are not allowed from such capital gains.
Long-Term Capital Gain
The long-term capital gains on which STT is paid were exempt in the hands of the Unitholders under Section 10(38) till the A.Y 2018-19.
Exemption for long-term capital gains arising from the transfer of units of business trust has been withdrawn by the Finance Act, 2018 w.e.f. Assessment Year 2019-20 and a new section 112A is introduced in the Income-tax Act.
As per Section 112A, long-term capital gains arising from the transfer of a unit of a business trust shall be taxed at 10% (without giving the benefit of indexation). The tax on capital gains shall be levied in excess of Rs. 1 lakh. The deductions under Chapter VI-A are not allowed from such capital gains.
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Rental income received from the business trust is taxable in the hands of the unit holder under which head of income HP or IFOS?