REIT & InvIT Taxation in India 2026: Why the Same Payout Can Be Exempt, Taxable, and Deferred All at Once

By Nitish Bharadwaj · Published Sep 20, 2026 · 7 min

A single REIT or InvIT distribution bundles several income types, each taxed differently: interest at slab rate, dividend either exempt or taxable depending on whether the SPV opted for the concessional 22% corporate tax regime, rental income exempt but still TDS'd at source, and return-of-capital not taxed now but reducing your cost basis for later. A pending 2026 bill would exempt SPV-115BAA dividends too, but it has only cleared the Lok Sabha. This guide breaks down each component, the TDS rates, and how to report it across Schedule OS, CG, and TDS.

A REIT or InvIT distribution lands in your bank account as a single number. The Income Tax Act sees up to four different things bundled inside it — interest, dividend, rental income, and a return-of-capital component — and taxes each one on its own terms: some at your slab rate, some exempt, one deferred entirely until you eventually sell. A 2026 amendment bill working its way through Parliament would simplify one piece of this. It isn't enacted yet, and treating it as settled law before it is can mean under-reporting income you're actually liable to pay tax on.

One Distribution, Multiple Tax Treatments

Interest — the Straightforward Part

The interest a REIT or InvIT passes through from its underlying SPVs is added to your income and taxed at your normal slab rate, reported under Income from Other Sources (Schedule OS). Resident unit holders see 10% TDS deducted under Section 194LBA regardless of the amount — this section carries no minimum threshold, so even a small quarterly interest component gets TDS applied. Non-resident unit holders face 5% TDS on the interest component instead, or the applicable DTAA rate with the right paperwork filed in advance.

Dividend — the Part That Depends on a Choice the SPV Made, Not You

Whether the dividend portion of your payout is taxable comes down to a decision made at the underlying SPV level, not by the trust or by you: has that specific SPV opted into the concessional 22% corporate tax rate under Section 115BAA? If it has, the dividend it distributes upward is taxed at your slab rate when it reaches you, with 10% TDS under Section 194LBA. If the SPV has stayed on the regular corporate tax rate instead, that same dividend passes through to you exempt, under Sections 10(23FC) and 10(23FCA). Most REIT and InvIT trusts hold several SPVs at once, so a single quarterly distribution can carry dividend income that's taxable for one portion and exempt for another — the trust's own distribution notice breaks this out line by line, and it's worth reading rather than assuming the whole dividend figure gets one uniform treatment.

Rental Income — Exempt for You, Still TDS'd at Source

For REITs specifically (InvITs don't hold rental property), rental income the trust receives directly and distributes onward is exempt in your hands for AY 2026-27. The exemption doesn't stop the TDS, though — trusts still deduct 10% under Section 194LBA on the distributed rental component regardless of its exempt status, which means you're claiming that TDS back as a refund when you file rather than avoiding it at source altogether.

Return of Capital — Not Taxed Now, But It Shrinks What You Can Claim Later

A portion of many REIT/InvIT distributions represents the trust passing back principal as SPV loans get repaid — this isn't income at all, and no tax applies to it in the year you receive it. Instead, it reduces your cost of acquisition for the units you hold. That deferral isn't a free pass: the moment you eventually sell, your capital gain is computed against the now-lower cost base, which means tax on this component is deferred to the point of sale, not eliminated. Keeping a running total of return-of-capital amounts received matters for exactly this reason.

Selling the Units: STCG and LTCG

For FY 2025-26 — the year covered by the return you're filing right now, AY 2026-27 — long-term REIT/InvIT unit gains fall under the older Section 112 framework at 12.5%, without the ₹1.25 lakh annual exemption equity mutual fund investors get under Section 112A; our capital gains tax on mutual funds guide covers how that exemption works for the comparable equity instrument. From FY 2026-27 onward, listed REIT and InvIT units move under Section 112A too, picking up the same ₹1.25 lakh exemption. Until that year actually arrives, don't apply the mutual fund exemption logic to a REIT/InvIT sale on this year's return.

How This Shows Up on Your ITR

REIT/InvIT income can't go on ITR-1 — you need ITR-2 at minimum. Taxable interest and dividend go under Schedule OS; exempt rental income belongs in the exempt-income schedule (report it even though it isn't taxed, since it's still income the department expects disclosed); capital gains from any unit sale go under Schedule CG; and every TDS deduction across all these components — including TDS on income that's ultimately exempt — needs to be reconciled against Form 26AS/AIS and claimed under Schedule TDS. Our Form 26AS vs AIS reconciliation guide covers exactly this kind of mismatch, which comes up often with REIT/InvIT TDS since a chunk of it applies to income that ends up exempt in your hands.

Before You File

• Pull your REIT/InvIT trust's quarterly distribution statements and use the interest/dividend/rental/return-of-capital breakup they already provide — don't estimate it yourself
• Confirm whether each SPV behind your dividend component has opted for Section 115BAA — the trust's distribution notice usually states this, and it determines whether that dividend is taxable
• Track return-of-capital amounts across every distribution received — you'll need the running total to correctly reduce your cost of acquisition when you eventually sell
• Reconcile every TDS entry against Form 26AS/AIS, including TDS on components that are ultimately exempt, and claim the refund
• Don't assume the pending 2026 amendment bill is already law — check its enactment status before treating any 115BAA-SPV dividend as exempt