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May 28, 2020

BUSINESS TRUST: Funding Operations in India


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BUSINESS TRUST: Funding Operations in India


Business Trust operates as Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’). These trusts are like mutual funds that raise resources from many investors to be directly invested in real estate or infrastructure projects. These are innovative vehicles that allow developers to monetize revenue-generating real estate and infrastructure assets that allow investors to invest in these assets without directly owning them.

REITs and InvITs have the following elements:

1. They raise capital by way of issue of listed units or in the form of debts;

2. They invest in income bearing assets by acquiring controlling or other specific interest in an Indian company known as Special Purpose Vehicle (‘SPV’).

REITs are trust that owns and manages income-generating developed properties and offers its unit to public investors. REITs invest in revenue-generating real estate assets. It distributes a major part of the earning among its investors. The income is in the form of rent or capital gains arising from the sale of real assets/shares of SPV. On the other hand, InvITs make an investment in infrastructure facilities, either directly or through an SPV. It will allow infrastructure developers to monetize specific assets, helping them use proceeds for completing projects.

Dividend and Interest income earned by the business trust from SPV in which it has made investments is exempt in the hands of business trust provided that such SPV is an Indian company having controlling interest as may be required. Income by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in hands of business trust being REITs. All other income of the business trust is taxable in the hands of business trust. Also, business Trust is required to file statements of income distributed to income tax authorities and unitholders within the prescribed time.

Income in the nature of interest/dividend is exempt in the hands of business trust, therefore, the same is taxable in the hands of unitholders on the distribution of the same by the business trust. Such income is subject to a tax deduction of 10% in case of payment are made to resident unitholders and in case of all other unitholders, the applicable TDS rate is 5%. The above income shall be taxable at applicable slab rates for resident unitholders and for non-resident unitholders, interest is taxable at 5% (plus applicable surcharge & cess) and the dividend is taxable at 20% (plus applicable surcharge & cess).

Income in the nature of rent is exempt in the hands of business trust therefore, it shall be taxable in the hands of unitholders on the distribution of the same by the business trust. Such income is subject to a tax deduction of 10% in case of payments are made to resident unitholders and in case of all other unitholders, the applicable TDS rate is the rates in force as mentioned in the Schedule to Finance Act. The above income shall be taxable at applicable slab rates for both resident and non-resident unitholders. All other income paid to the unitholders by the business is exempt in the hands of unitholders.


Note: TDS rates for period beginning from 14th May 2020 till 31st March 2021 shall be reduced by 25% of the existing rate for resident unitholders only.