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A couple of weeks back we wrote a piece on taxation on various forms of gold. This leads us to think, why not write about another class of investment which is still in its nascent stages in India but might be worth looking into, REIT.
Ab REIT Bhala kya cheej hai?
The full form of REITs is Real Estate Investment Trust. It is quite easy to understand REITs. Imagine you have a mutual fund that invests in real estate properties. Those properties can range from commercial properties to apartments. Hospitals and warehouses included. In short, anything with a wall. These properties generate rent and also see appreciation in their values. Just like companies held by mutual funds dole out dividends and rise in values.
Now replace, the fund mentioned above with a company. So in effect REITs are companies that own real estate properties. However, just like the way we can buy units of mutual funds one can buy units of such REITs.
Now one may ask how are they different than purchasing shares of the Embassy group or any other real estate giant? Their main focus is on investments and not on construction. As per law, they are allowed to invest only 10% of their money in properties that are under construction. All the more, 80% should be invested in income-generating properties and the incomes should be distributed to the shareholders. It is their headache to ensure that the properties are raised on rent, if not then they can sell it and need to invest in other rent generating properties. Just like mutual fund managers, REIT managers need to maximise profits for the unitholders. Hence, they are closer to being mutual funds of Real Estate Properties than being called a company.
However, they are floated by companies. Right now, we have 2 listed REITs. One by Embassy Group and the other one by Mindspace group.
Mein Investment kyun karun?
I don’t know about others but growing up my parents had a deep distrust of the stock market. They believed either in SBI FDs, Gold or Real Estate Properties. However, for most of the mango people purchasing gold is not an easy task. So the government following the footsteps of what they saw in the US market decided to bring in REITs. Because REITs would let the masses own at least a part of the properties. Without having to shell out crores of rupees for one piece of property. This instrument brings the dream of owning properties slightly closer and helps diversify the asset classes one could invest in.
DISCLAIMER: That is not to say I am advising the readers to invest in the products. Take your own call. We just write and none of us are Rakesh Jhunjhunwala
In-Hand kya bachega? Taxation batao?
This is where the going gets slightly complicated. However, this article is mainly for the unitholders and not the Business Trusts, therefore, would write the taxation gyan for the unitholders mainly.
Though I have a lot of misgivings about the amendments in the finance bill, 2020. I would like to be a professional and tell the rates.
So from a REIT, one can have 4 major sources of income. The dividend, Interest Income, Rental Income, and capital gains from the sale of the REIT units.
Dividend after the abolition of the Dividend Distribution Tax is taxable in the hands of the unitholders as per his slab rates. However, if the REITs (Business Trust) chooses to be taxed at the normal rate (25%/30%) and not at the concession rate (22%) then the Dividend income will be tax-free.
Interest income is straight forward. Just add it to your total income and pay tax according to your slab.
For the rental income, one should be able to claim a standard deduction of 30% in section 24, which is given to the property owners.
And when talking about the capital gains, if you hold the listed REITs for more than 3 years. It will be deemed as a long term capital asset but will not be taxed if your capital gains for that year are less than INR 1 lakh. Above that, it is flat 10%. So for long term capital gain of INR 110,000. One would have to pay INR 1,000 as tax. Because the first INR 1,00,000 is exempted.
Short term capital gains at 15%.
CAVEAT: This convoluted structure is not even the tip of the Iceberg. When one is investing in the REITs, one should definitely look at their structure and the proportion of income (read section 10(23FC) of the Income-tax act as well). How much of the income is coming from which source? Because even the REITs need to pay taxes. The REITs were supposed to be proper pass-through devices. I guess the government believes in the idea of struggle.
