Recent Tax Amendments: Restoring The Dividend Exemption For REIT And InvIT Unit Holders

Recent Tax Amendments:  Restoring the Dividend Exemption for REIT and InvIT Unit Holders

1. The Pre-Amendment Position

Business trusts — Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) — and their unit holders are taxed under a pass-through framework built around Section 223 of the Income-tax Act, 2025 (corresponding to Section 115UA of the erstwhile 1961 Act), read with Schedule V (Table Serial Nos. 3, 4 and 5) of the ITA 2025, which mirror clauses (23FC), (23FCA) and (23FD) of Section 10 of the ITA 1961. Certain categories of income bypass the trust entirely and are taxed directly in the hands of unit holders; everything else is taxed once at the trust level and exempted when it is subsequently distributed.

Dividend received by a business trust from its Special Purpose Vehicle (SPV) sits in the first category. It is exempt in the trust's hands under Schedule V (Table Sl. No. 3), and, when passed on to unit holders, exempt there too under Schedule V (Table Sl. No. 5). There is, however, a condition attached: clause (b) of Column D of that entry withdraws the unit holder's exemption whenever the dividend traces back to an SPV that has opted for the concessional tax regime under Section 200 (corresponding to Section 115BAA of the 1961 Act).

The consequence is that a unit holder's tax outcome hinges on a decision taken entirely by the SPV. Where the SPV stays on the regular corporate regime, the dividend reaches the unit holder tax-free. Where it elects the concessional regime under Section 200, that same dividend becomes taxable in the unit holder's hands — a result driven by a choice the investor had no part in making.

2. What the Amendment Changes

TOLA 2026 responds with two connected changes:

2.1 Dividend Exemption No Longer Tied to the SPV's Regime

With effect from 1 April 2026, TOLA omits clause (b) of Column D of Schedule V (Table Sl. No. 5) — the provision that had denied exemption to unit holders whenever the underlying SPV opted for the concessional regime under Section 200. Once that clause is gone, the exemption no longer depends on which regime the SPV has chosen.

In effect, dividend received by a business trust from an SPV, and distributed to unit holders, will now be exempt whether the SPV has stayed on the regular regime or migrated to the concessional one under Section 200. The distinction that once separated the two scenarios is removed.

2.2 A Higher Surcharge for SPVs on the Concessional Regime

The second change, also effective 1 April 2026, amends the surcharge table under Section 3(4)(b) of the Finance Act, 2026.

At present, domestic companies opting for the concessional regimes under Section 200 or Section 201 (corresponding to Sections 115BAA and 115BAB of the 1961 Act) pay a 10% surcharge, per Serial No. 9 of that table read with Section 3(12)(b) of the Finance Act, 2026. TOLA 2026 separates out SPVs referred to in Schedule V (Note 2) — the equivalent of the Explanation to Section 10(23FC) of the 1961 Act — from that general category. Serial No. 9 is accordingly split: it continues to apply the 10% surcharge to domestic companies generally, while a new Serial No. 9A fixes the surcharge for SPVs opting for Section 200 or 201 at 25%.

The two changes are best read together. Widening the exemption under Schedule V (Table Sl. No. 5) brings within its scope dividend that was previously taxable in unit holders' hands — a direct cost to the exchequer. The higher surcharge on the SPV is designed to recover that shortfall.

2.3 Why the Amendment was Needed

Both the amendments neither change stands on its own; instead both followed directly from the MAT overhaul carried out by the Finance Act, 2026.

That Act amended Section 206 of the ITA 2025 (corresponding to Sections 115JAA/115JB of the 1961 Act) to make MAT a final tax, prospectively, for companies that remain on the old regime, while allowing companies migrating to the concessional regime under Section 200 or 201 to set off MAT credit accumulated under the 1961 Act, subject to conditions. The underlying policy intent is to nudge companies toward the concessional regime.

An SPV is a domestic company like any other, and the same pull applies to it — the chance to unlock accumulated MAT credit, or simply to stop accruing further MAT liability under the old regime.

This is where the two frameworks collide. A business trust's pass-through structure withdraws the dividend exemption the moment its SPV opts for Section 200. Therefore, a migration that the MAT reform actively encourages, and that makes sound commercial sense for the SPV, ends up penalising the very unit holders the pass-through structure was designed to protect. A tax decision made by the SPV, for the SPV's own reasons, determines whether the unit holder keeps or loses an exemption over which the unit holder has no say.

The Government has acknowledged this tension in the FAQs issued alongside TOLA 2026, noting that SPVs may need to migrate — either to utilise accumulated MAT credit or to avoid continuing MAT exposure under the old regime — and that such a move would otherwise cost unit holders their exemption. Omitting clause (b) of Column D of Schedule V (Table Sl. No. 5) is the fix: it decouples the two outcomes and restores certainty for investors.

Seen this way, the amendment is not a fresh concession to unit holders. It is a correction — one that lets the MAT reform achieve its purpose of encouraging migration without collateral damage to the pass-through regime that REITs and InvITs rely on. The surcharge increase from 10% to 25% is the fiscal counterweight that keeps the correction revenue-neutral.

2.4 A Gap the Amendment Leaves Behind: TDS

A business trust must deduct tax at source on pass-through income paid to its unit holders — under Section 393(1) [Table Sl. No. 4(ii)] for resident unit holders, and under Section 393(2) [Table Sl. Nos. 6 and 7] for non-residents.

Because dividend distributed to unit holders was, until now, exempt only where the SPV had not opted for Section 200, Section 393(4) [Table Sl. Nos. 5 and 13] mirrors that exemption on the withholding side, relieving the trust of any obligation to deduct tax on such dividend.

TOLA 2026 extends the substantive exemption to all unit holders, irrespective of the SPV's regime. Logically, Section 393(4) should have moved in step, relieving the trust of TDS obligations on the same universal basis. That consequential amendment has not been made. The result is an inconsistency: the underlying income is now exempt across the board, but the withholding relief still tracks the SPV's tax regime as it did before. This looks like an oversight rather than a deliberate policy choice, and it is one that will need correcting to bring the TDS provisions in line with the amended exemption.

2.5 The Position at a Glance

The table below summarises how the proposed amendments change the tax outcome, depending on the regime the SPV has adopted.

Taken together, the two amendments restore the certainty that REIT and InvIT investors had been seeking — the dividend component of their distribution is no longer hostage to a regime choice made at the SPV level. What remains outstanding is the TDS mismatch at Section 393(4), which, until corrected, will keep the withholding mechanics one step behind the substantive law.

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The views expressed in this article are solely those of the author in her personal capacity and are based on her understanding of the applicable legal and regulatory framework. They do not necessarily represent the views, policies or practices of organisation with which the authors is associated.