As India’s commercial real estate grows rapidly, REITs have quietly become a preferred investment route for both institutions & retail investors. But behind every smooth distribution you see in your REIT dashboard lies a carefully designed tax mechanism that allows these trusts to operate efficiently. One of the most important among these provisions is Section 10(23FCA).
At its core, this section provides an exemption for specific rental income received by a business trust, particularly a Real Estate Investment Trust (REIT), from real estate assets it directly owns. This ensures that income does not get taxed multiple times at different layers, keeping REITs investor-friendly while maintaining transparency in taxation. When the law exempts any income of a business trust, being a real estate investment trust, it is essentially encouraging clean, regulated, organised investment in commercial property.
For Indian investors who want exposure to Grade-A office assets without buying entire properties, this tax clarity is what makes REITs viable.
What Exactly Gets Exempted Under Section 10(23FCA)?
To understand the value of this section, you have to look at how REITs earn money. Their primary revenue stream is rental income from commercial properties such as office parks, business hubs, or specialized real estate assets. When a REIT owns a property directly (not indirectly through an SPV), the rent it receives could technically be taxed as business income.
But Section 10(23FCA) steps in & solves this problem."
It provides an exemption for specific rental income received by a business trust from such directly held assets. The logic is simple: If REITs were taxed heavily at the trust level, there would be less to distribute to unitholders. India wanted to avoid this double-tax structure because REITs thrive only when distributions remain stable and predictable.
This is why the law states that “any income of a business trust, being a Real Estate Investment Trust” that meets the prescribed conditions will enjoy this benefit.
The result? A smoother, cleaner flow of income to investors with minimal leakage.
Also Read: Exemption for Sovereign Wealth Funds and Pension Funds
Why the Government Created This Exemption
Taxation in real estate has always been layered and complex. Investments pass through landowners, developers, SPVs, companies, and financiers before the final structure reaches retail investors. For REITs to work in India, the government knew that investors needed clarity & confidence.
Section 10(23FCA) was designed with three intentions:
- To remove tax bottlenecks that would discourage participation in REITs.
- To ensure certain incomes remain tax-efficient within the trust structure.
- To offer an Exemption to Business Trust so that distributions remain attractive.
Essentially, the government wanted REITs to succeed in India because they help developers reduce debt, attract foreign investment, & give retail investors access to high-quality commercial properties. Providing tax exemptions for certain incomes makes that journey easier.
How This Exemption Helps REIT Investors Directly
When REITs earn rental income tax-free under Section 10(23FCA), the net distributable cash flow increases. That translates into:
- Higher distribution yields
- Less tax duplication
- Better investor confidence
- Wider participation from retail and HNIs
- Improved liquidity in listed REIT units
This clean taxation model mirrors global REIT structures, making Indian REITs more competitive internationally. For example, in mature markets like Singapore or the US, transparent tax exemptions are a big reason why institutional investors flock to REITs. Section 10(23FCA) pushes Indian REITs in the same direction.
Example: How Section 10(23FCA) Works in Real Life
Imagine a REIT that directly owns a commercial office tower in Bengaluru. It leases the building to multiple IT companies & receives monthly rental income.
Normally, this rental income could be taxed as business income.
But thanks to Section 10(23FCA):
- The rental income becomes exempt at the REIT level."
- The trust distributes the income to unitholders.
- Investors are taxed only as per rules applicable to them (depending on income type).
This prevents cascading taxation & preserves the attractiveness of the asset class.
Also Read: How VCFs & VCCs Earn Tax-Free Income in India
How Section 10(23FCA) Fits into the Bigger Tax Picture
A REIT’s overall tax structure involves multiple layers—SPVs, interest income, dividend income, rental income, and capital gains. Section 10(23FCA) addresses just one part of this chain, but it is a crucial part. Without it, the distributions you see every quarter might have been significantly lower.
For business trust managers, tax advisors, & investors, this clarity is extremely beneficial. It is one of the reasons why listing REITs on Indian exchanges has become smoother in recent years.
Final Thoughts — Why Section 10(23FCA) Still Matters Today
As India scales its commercial real-estate economy, REITs will only become more important. Whether you're a retail investor, a startup founder planning office expansion, or a finance professional tracking India’s capital markets, understanding how tax exemptions work inside a REIT is essential. Section 10(23FCA) ensures rental income from directly owned real estate does not get unfairly taxed, allowing REITs to remain competitive & helping investors earn steady, predictable returns.
If you want help understanding REIT taxation or need personalised guidance for your investments, our experts at CallMyCA.com can break it down for you in a simple, actionable way.
