Over the last few years, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) have moved from being niche instruments to widely accepted investment products in India. As more retail and institutional investors diversify through business trusts, one common question arises during tax season: “How is the income I receive from my REIT or InvIT taxed?”
This is where Section 10(23FD) becomes important.
The provision deals with the taxability of income distributed by a business trust. More specifically, it exempts the distributed income received by a unit holder—provided the trust earns this income from eligible sources defined under the Act.
By exempting certain payouts, the government ensures that business trusts remain attractive, tax-efficient & aligned with global REIT/InvIT structures. For everyday investors, this translates to cleaner taxation, fewer compliance headaches and clarity on what portion of the distribution is taxable and what portion is not.
What Section 10(23FD) Actually Says
Section 10(23FD) deals with the taxation of income distributed by a business trust (such as a REIT or an InvIT) to its unit holders. Under this section:
- Any distributed income received by a unit holder that is sourced from specific categories of income earned by the business trust is exempt from tax.
- These categories include income earned by the trust directly from eligible real estate or infrastructure assets.
In simpler words, if the business trust earns certain types of rental income, interest income, or income from directly owned assets, then the distribution of that income to unit holders becomes exempt from tax in the hands of the investor.
This exemption ensures that income is taxed only once—usually at the trust level—creating a transparent & stable structure for investors.
Why Business Trusts Receive Special Tax Treatment
REITs and InvITs play a significant role in India’s infrastructure & commercial real estate ecosystem. They allow investors—including small retail investors—to participate in large-scale income-generating assets.
Section 10(23FD) supports this goal through three major tax benefits:
- Eliminates Double Taxation
Without this exemption, both the trust & the unit holder would get taxed on the same income stream. Section 10(23FD) ensures that eligible income is taxed only once, usually at the level of the business trust."
- Encourages Wider Participation
Retail investors often evaluate post-tax returns before investing. The exemption improves net yields & makes business trusts more competitive compared to traditional fixed-income products.
- Provides Clarity and Stability
The Income Tax Act carves out a defined framework so that investors know exactly which components of their distribution are exempt and which are not.
Also Read: Guide to Exemption for Business Trusts
Which Distributions Are Exempt Under Section 10(23FD)?
A business trust generally distributes income under multiple heads—interest, rental income, dividend income, & sometimes return of capital. Under Section 10(23FD), the exemption applies only to specific categories, typically:
- Rental income directly earned from real estate assets owned by the REIT
- Interest income earned from special purpose vehicles (SPVs)
- Certain income streams notified by the tax authorities
These payouts become exempt in the hands of the unit holder, ensuring the investor does not have to pay tax again on the same income.
Other components—like dividend (taxable based on SPV type), capital gains, or return of capital—are taxed under different rules.
How the Exemption Works in Practice
Let’s break down a simple flow:
- A REIT directly owns commercial real estate.
- It earns rental income from these assets.
- This income is taxed or exempt at the trust level depending on conditions.
- When the REIT distributes this rental income to unit holders,
→ Section 10(23FD exempts it from tax in the hands of the investor.
This ensures transparency & avoids duplicate tax obligations.
Why This Matters for Unit Holders
If you invest in a REIT or InvIT, you may receive different types of distributions across the year. Section 10(23FD) helps you:
- Understand which portion of your payout is exempt
- Avoid unnecessary tax payment on exempt income
- Plan your taxes more accurately
- Maintain correct reporting in your ITR
For high-value investors & NRI unit holders, this clarity is especially important because distribution structures can significantly impact post-tax returns.
Also Read: The Tax Exemption That Keeps Religious and Charitable Boards Free from Tax Burden
Compliance and Reporting for Investors
Even though the income may be exempt, investors must:
- Enter the exempt portion under the appropriate ITR schedule (usually Schedule EI)"
- Report any taxable portion separately
- Maintain distribution statements shared by the business trust
Business trusts generally provide a detailed breakup of the distribution every financial year, making compliance straightforward.
Example for Better Understanding
Suppose a REIT distributes ₹10,000 to a unit holder in a given month:
- ₹6,000 is rental income from directly owned real estate
→ Exempt under Section 10(23FD) - ₹2,000 is interest from SPVs
→ Exempt - ₹2,000 is dividend income
→ Taxability depends on SPV structure (may be taxable or exempt)
The unit holder needs to report only the taxable portion & declare the exempt portion separately.
How Section 10(23FD) Strengthens India’s Investment Ecosystem
India’s push toward transparency, infrastructure development & REIT-led capital formation relies on tax structures that reduce friction for investors. Section 10(23FD) is a critical pillar in this system.
It ensures:
- Stability for business trusts
- A competitive investment environment
- Protection of unit holder interests
- Predictable tax outcomes
As India’s real estate and infrastructure markets mature, such exemptions encourage long-term & retail participation.
Also Read: Exemption for Sovereign Wealth Funds and Pension Funds
Conclusion
Section 10(23FD) of the Income Tax Act offers a focused tax exemption to unit holders receiving distributed income from business trusts like REITs and InvITs. By exempting qualifying payouts, the law prevents double taxation & supports a more efficient investment landscape. For investors, this translates into clarity, better post-tax returns and a simplified tax filing process.
Need expert help decoding REIT/InvIT taxation or planning your investments more efficiently? Connect with a CA at CallMyCA.com — your tax clarity starts here.
