Are Investment in Indian REITs par with StockMarket for Capital Gains ?

The newly elected most competitive Indian government under #NarendraModi has announced tax pass through
for REITs in the recently presented Union Budget F2015. This should facilitate REIT formation in the months ahead, we believe. We have presented below the highlights of the tax pass through.

Trading of listed REIT units would attract the same levy of STT and would enjoy the same tax benefits with respect to capital gains as equity shares of a company – This should put investments in the units of REITs at par with the stock investments in terms of capital gains tax, we believe [Clarifications Awaited]

The Following Flow Chart Shows How REITs can Operate in India
REIT Returns in India
Taxation of capital gains arising to the sponsor (i.e., developer) at the time of exchange of shares in SPVs with units of the business trust would be deferred and taxed at the time of disposal of units by
the sponsor. However preferential capital gains regime will not be applicable for these units to the sponsor. For the purpose of computing capital gain, the cost of these units shall be considered as cost of the shares to the sponsor – This should cushion the capital gains tax for developers.

Income in the form of interest received by the REIT from the SPV is accorded pass through treatment; it will be taxed neither at the trust level nor at the SPV level. However, a withholding tax of 10% in case of resident unit holder and 5% in case of non-resident unit holder will be effected by the trust on the interest income distributed to the unit holder.

Dividend received by the trust shall be subject to dividend distribution tax at the SPV level and
exempt at the trust level. Similarly, dividend income distributed to the unit holders by the trust also would
be tax exempt – This implies that government has eliminated double dividend distribution tax.

Capital gains arising on disposal of assets by REITs would be taxable in the hands of the trust. But if such gains are distributed to the unit holders, the component of distributed income attributable to capital gains would be exempt in the hands of the unit holder.