Introduction

What would you do if you could invest in India's ever-growing and profitable real estate market without dealing with the headache of purchasing and managing property? Real Estate Investment Trusts (REITs) give you precisely that option. It allows you to invest in substantial assets such as office towers, shopping malls, warehouses, etc.

You can use the REIT vehicle to diversify your investment specialisation while participating in the real estate market through the REIT's returns and distributions. In this blog, we will find out how REITs work, the tax benefits of REITs, and some advice on navigating the taxation of REITs to maximise your wealth.

What are REITs and how do they work?

REITs aggregate funds from various investors like you and acquire and manage income-generating properties. Since the first REITs were listed in 2019, the REIT market in India has expanded and seen renewed interest from investors after regulatory clarifications and tax changes in 2024–25. The various players in the Indian REITs manage several billion worth of assets across cities like Mumbai, Bengaluru, and Hyderabad. If you're an investor here, you can even invest easily in any of these trusts through stock exchanges and purchase units just like one would through shares, with the convenience of online trading. The best part about investing in a REIT is that you may get double benefits. You are entitled to receive regular dividends (typically quarterly) from their rental income and the ability to earn capital appreciation through the underlying interests rising in value alongside real estate prices. In the past, Real estate investment trust returns in India have returned between 6% and 8% as dividends, with total returns (with price appreciation) returning around 15% to 20% in strong property markets. Of course, past performance does not guarantee future performance.

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Different REIT types for your portfolio

You can expect different REIT types to suit your risk tolerance. Equity REITs own and lease properties available for rent in the marketplace, earning their income from the rents paid by commercial tenants. Mortgage REITs do not own properties; they only lend money and gain the interest paid on that loan. Hybrid REITs own portfolios of mortgages and have directly owned properties, allowing diversified exposure. Most REITs in India are equity-focused, targeting high occupancy environments generating cash flow (some institutional REITs operate at low average occupancy rates).

Understanding REIT Taxation in India

It will depend on the source of income. If your dividends come from SPVs (special purpose vehicles) that have paid corporate tax, these will likely be exempt in your hands. However, suppose the SPV were to choose a lower tax regime (for example, 22% under Section 115BAA). In that case, the dividend will be included in your income and taxed at your slab (anywhere between 5%-30% respectively, plus surcharge and cess). If your dividends exceed ₹5,000 annually, you will see a TDS at 10% (5% for non-residents, though tax treaties may apply). Interest income from REITs will be subject to TDS at 10% for residents.

Capital Gains and REIT Income Taxability

REIT income taxability also covers capital gains. The sale of REIT units within 12 months will result in short-term capital gains (STCG), which will be taxed at 15% plus cess. If you hold for longer than 12 months, you will incur long-term capital gains (LTCG) at 12.5% on gains above ₹1.25 lakh in a year, as provided in the 2024 Budget, without indexation. This aligns REIT taxation with the taxability of equities, making the REITs more comparable.

How to Calculate Taxable Income from a REIT

Determining taxable income from a REIT is very straightforward but requires some diligence. Let's say you received ₹12,000 in the quarter: ₹7,000 is a tax-exempt dividend, ₹4,000 is taxable interest, and ₹1,000 is repayment of capital (not taxable but reduces cost base). You would report taxable interest on your tax return in 'Income from other sources.' With regards to capital gains, subtract your adjusted purchase cost from the sale price (the gain) and then apply the appropriate short-term capital gains (STCG) or long-term capital gains (LTCG) rates.

Reasons Why You May Want to Invest in a REIT

The tax advantages of the REIT arrangement do not stop there. REITs provide liquidity, meaning you can buy, sell, and trade units on the NSE or BSE. REITs also provide expert management, relieving you of operating and maintaining real estate costs and hassles. Additionally, REITs have lower minimum investments (starting as low as one unit: between ₹100 to ₹500), so smaller portfolios can benefit from diversification with a REIT.

Are REITs Right for You?

If you are looking for a reasonable income, a hedge against inflation, and exposure to real estate without the hassle, we would say REITs are a strong candidate. Just remember that there are risks, such as variations in the market and rising interest rates, that could diminish returns. Do your research to capitalise on this investment and invest wisely. Review REIT portfolios on stock trading apps, look for dividend and total return histories, and consult your tax advisor to assess what REIT taxable income is included based on your personal or financial situation.

Conclusion

REITs can help you participate in returns associated with real estate investment trusts while capitalising on all REITs' efficient tax planning attributes. As the REIT market in India continues to expand with confidence, now is the time to learn more about how to benefit as an investor from this incredible vehicle with Motilal Oswal.

Related read: The Pros and Cons of investing in REIT funds