- Parliament approved tax changes for REITs and InvITs to ensure dividend exemptions for unit holders.
- The bill decouples dividend exemptions from the underlying company’s chosen corporate tax regime.
- A twenty-five percent surcharge will apply at the corporate level to offset the investor-level benefit.
Parliament has approved a tax change that could keep qualifying dividend income exempt for unit holders even when the underlying company uses India’s concessional corporate-tax regime. The measure covers distributions routed through Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), but it does not make every payout tax-free.
The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, on August 6, 2026. The Rajya Sabha passed it on August 10, 2026. As of August 14, 2026, the Bill was awaiting Presidential assent.
Free toolSubstantial Presence Test Calculator
The amendment is intended to apply from April 1, 2026, unless a separate effective date applies. It would remove the link between the unit-holder exemption and the tax regime selected by the trust’s underlying company.
Investors still need the tax breakup. Cash credited to an account is not the same as exempt income.
The measure addresses a conflict in the existing structure. A trust generally holds income-producing assets through one or more special purpose vehicle companies, commonly known as SPVs. An SPV can distribute income to the trust, which then passes amounts to its unit holders.
Under the earlier rule described in the Bill materials, the dividend exemption depended on whether the SPV remained under the old tax regime. If it selected the concessional regime under section 200 of the Income-tax Act, 2025, the dividend component could become taxable for unit holders at their applicable slab rates.
The Bill would omit the restriction in Schedule V that prevented the exemption in that situation. The Central Board of Direct Taxes described the mechanism this way:
"Clause (b) of the Schedule V [Table: Sl. No. 5.D] is proposed to be omitted to provide exemption on dividend received by a unit holder, even where SPV has exercised the option under section 200 of the Income-tax Act, 2025 to move to new tax regime"
The relief comes with a higher company-level charge. The proposed surcharge for a qualifying SPV using the new regime would rise from 10% to 25%, instead of the otherwise applicable 10% rate specified in the relevant Finance Act provisions.
That trade-off affects the trust’s economics. A higher surcharge at the SPV level could offset some of the benefit created by the investor-level exemption.
The exemption covers one component, not the whole distribution
A trust’s payment can combine several types of income. The distribution may include dividend, interest, repayment of debt, amortisation, rental income, capital gains or another amount, with each category carrying separate tax treatment.
Only qualifying dividend income routed through the prescribed structure falls within the proposed exemption. Interest income remains subject to its applicable rules, as do rental income, capital gains from selling units and other non-dividend amounts.
The annual or quarterly statement issued by the trust therefore becomes the central filing document. It should show how the total payment has been classified.
An example cited in discussions of the amendment involves an investor in the 30% tax bracket receiving a ₹75,000 dividend. The current tax liability in that example is approximately ₹23,400, which would fall to zero if the amendment takes effect as proposed.
That illustration does not establish a result for every investor. The actual liability depends on the character of the payment, the investor’s residential status and the final enacted provisions.
The new regime could alter trust-level decisions
The amendment removes a tax obstacle for an SPV considering the concessional company-tax regime. It could also make the pass-through treatment more consistent when the underlying company changes regimes.
Chintak Shah, Associate Director, Anand Rathi Wealth, said the measure is "expected to improve the post-tax returns from investments in REITs and InvITs," particularly for High-Net-Worth Individual investors.
Suresh Surana, Chartered Accountant, called the amendment "favourable for its unitholders" because it would provide a clear dividend exemption even under the concessional regime.
Arjun Sharma, Vice Chairman, Nexus Select Trust, described the measure as a "constructive step towards building a deeper and more mature REIT ecosystem" and said it could encourage more asset owners to consider the trust route.
The tax effect will not be identical across trusts. Management must compare corporate tax, the 25% surcharge, available deductions, minimum alternate tax credits and the expected composition of future distributions.
The amendment does not require every trust to change its structure. Nor does it guarantee a higher cash distribution per unit.
The research cited a possible reduction in the maximum effective tax rate from 34.94% under the old regime to 28.60% under the new regime. That figure describes a potential trust-level outcome, not a guaranteed return for an individual unit holder.
Retail investors could gain filing clarity because they would no longer need to track whether the underlying SPV selected the old or new regime for the dividend exemption. Investors in the 30% or higher brackets could see the largest direct benefit from the change.
NRI investors still face cross-border filing questions
The amendment may improve the India-side treatment of qualifying dividend income for non-resident Indian investors, provided the statutory conditions are met. It does not remove obligations in the investor’s country of residence.
An NRI may need to examine foreign tax reporting, treaty eligibility, foreign tax credits, Indian tax deducted at source and any refund procedure. Currency conversion and disclosure rules may also apply.
Income exempt in India may still require reporting abroad. Indian tax withheld above the final liability may require an Indian return and refund claim.
The applicable Double Taxation Avoidance Agreement can affect the analysis. Residential status remains relevant to the result.
Investors should preserve the records behind each payment
The Bill replaces the Income-tax (Amendment) Ordinance, 2026, issued in June to provide initial relief for foreign investors. The amendment’s final operation still depends on Presidential assent and the enacted text.
Investors should retain the trust’s annual or quarterly distribution statement, Form 26AS and Annual Information Statement entries, tax deduction certificates where applicable, and purchase and sale records.
NRI investors should also retain evidence of residential status and treaty eligibility. They should check whether each payment relates to a period before or after the amendment’s effective date.
The final Gazette Act or later rules could add conditions. Those details will determine how the proposed exemption works in filed returns for income covered by the April 1, 2026 start date.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
