Published 9 May 2026
Sub-section (1) and (2) of section 115UA of the Income-tax Act, 1961 read with the Finance Act, 2023 amendment -- the four-component distribution composition (interest pass-through; dividend pass-through; rental pass-through; debt-repayment / return-of-capital component); the new 'specified income' treatment of the debt-repayment component as Other Sources at slab; the cost-basis adjustment under sub-section (2A) of section 115UA inserted by Finance Act, 2023; and the practitioner's framework for retail and HNI investors holding listed REIT / InvIT units
Taxpayer Brief
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) listed on Indian stock exchanges -- Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India Real Estate Trust, India Grid Trust, IRB InvIT, PowerGrid InvIT and others -- distribute quarterly cash flow to unit-holders. The distribution typically comprises four components -- (i) interest received by the REIT / InvIT from its underlying Special Purpose Vehicles, passed through to unit-holders as interest; (ii) dividend received by the REIT / InvIT from its underlying SPVs, passed through to unit-holders as dividend; (iii) rental income received by the REIT, passed through to unit-holders as rental; (iv) repayment of debt / capital from the underlying SPVs to the REIT / InvIT, passed through to unit-holders as 'debt repayment' or 'return of capital'. Under sub-section (1) of section 115UA, the first three components retain in the unit-holder's hands the character they had in the trust's hands, and are taxed according to that character. The fourth component -- the debt-repayment / return-of-capital -- was historically TAX-FREE in the unit-holder's hands as a return of capital. The Finance Act, 2023 changed this from assessment year 2024-25. Under clause (xii) of section 56(2), the debt-repayment component becomes taxable as income from other sources once the total of such distributions on a unit exceeds the unit's issue price; until then, Explanation 1 to section 48(ii) reduces the cost of acquisition of the unit instead. This article walks through the framework and a worked computation for an HNI investor.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Retail REIT / InvIT investor with modest holdings | Low | Standard pass-through; small debt-repayment component |
HNI investor with substantial REIT / InvIT allocation | High | Debt-repayment component taxable once distributions on the unit exceed its issue price |
Pre-1 April 2023 acquisition with mid-life debt-repayment distributions | Very High | Cost reduced under Explanation 1 to section 48(ii); running total of distributions since issue |
Mixed-trust portfolio across multiple REITs / InvITs | Very High | Per-trust component tracking; per-distribution classification |
1. The Statutory Framework
Provision | Effect |
|---|---|
Sub-section (1) of section 115UA | Pass-through framework for income distributed by business trust (REIT / InvIT) to unit-holders -- interest, dividend, rental components retain their character in the unit-holder's hands |
Clause (xii) of section 56(2), inserted by the Finance Act, 2023 with effect from 1 April 2024 | Taxes as income from other sources the 'specified sum' received from a business trust: A - B - C, where A is the total of distributions on the unit since issue (to the present or any earlier holder) that are neither of the nature referred to in section 10(23FC) or 10(23FCA) nor taxed under section 115UA(2); B is the issue price of the unit; and C is the amount already taxed under this clause. The result is taken as nil if B and C together exceed A |
Sub-section (3A) of section 115UA, inserted by the Finance Act, 2023 with effect from 1 April 2024 | The pass-through rule in sub-section (1) does not apply to a sum taxable under section 56(2)(xii) |
Explanation 1 to section 48(ii) | The cost of acquisition of a unit of a business trust is reduced, and deemed always to have been reduced, by any sum received on it that is not of the nature referred to in section 10(23FC) or 10(23FCA) and is not taxed under section 56(2)(xii) or section 115UA(2) |
Why the Finance Act, 2023 closed this loophole Before assessment year 2024-25, the debt-repayment component of a distribution was not taxed in the unit-holder's hands. Clause (xii) of section 56(2), with section 115UA(3A), changes this from assessment year 2024-25: the debt-repayment component becomes taxable as income from other sources once the aggregate of such distributions on a unit exceeds the unit's issue price. |
2. The Four-Component Distribution Composition
Component | Before Assessment Year 2024-25 | From Assessment Year 2024-25 |
|---|---|---|
Interest, dividend and rental pass-through | Retain their character under section 115UA(1) and are taxed accordingly | No change |
Debt-repayment / return of capital | Not taxed in the unit-holder's hands | Not taxed until the total of such distributions on the unit exceeds its issue price, but reduces the cost of the unit under Explanation 1 to section 48(ii); beyond that point taxed in full under section 56(2)(xii) at the slab rate |
3. Worked Example -- Embassy REIT HNI Investor
An illustrative case, with assumed figures. Mrs. Riddhi, taxed at 30 per cent plus 10 per cent surcharge and 4 per cent cess (34.32 per cent), buys 1,00,000 units of a listed REIT in March 2024 at Rs 320 per unit -- aggregate cost Rs 3.20 crore. The trust issued the units at Rs 300. Debt-repayment distributions of Rs 290 per unit had already been paid on each unit, to earlier holders, before she bought. She then receives Rs 7 per unit of debt repayment in each year (the interest, dividend and rental components are taxed by their own character and are left out here).
Year | A: total since issue (Rs per unit) | Specified sum A - B - C (Rs per unit) | Taxed on 1,00,000 units (Rs) | Tax at 34.32% (Rs) | Cost per unit after the year (Rs) |
|---|---|---|---|---|---|
FY 2024-25 | 297 | 297 - 300 - 0 = nil | Nil | Nil | 313 (320 less the untaxed 7) |
FY 2025-26 | 304 | 304 - 300 - 0 = 4 | 4,00,000 | 1,37,280 | 310 (313 less the untaxed 3) |
FY 2026-27 | 311 | 311 - 300 - 4 = 7 | 7,00,000 | 2,40,240 | 310 (no untaxed amount) |
The structural impact Until the running total passes the issue price, the debt repayment is not taxed when received; it lowers the cost of the unit, so it is taxed later as capital gain on sale. Once the running total passes the issue price, every further rupee is taxed at the slab rate in the year of receipt and no longer reduces cost. In the example, a sale after FY 2026-27 would be computed on a cost of Rs 310 per unit; a long-term gain on a listed unit falls under section 112A, taxed at 12.5 per cent for transfers on or after 23 July 2024. Because A counts distributions to earlier holders, a buyer of an older unit can cross the issue price sooner than his own receipts suggest. |
4. The Cost Reduction under Section 48
Explanation 1 to section 48(ii) reduces the cost of acquisition of a unit by any sum received on it that is not of the nature referred to in section 10(23FC) or 10(23FCA) and is not taxed under section 56(2)(xii) or section 115UA(2). A rupee of debt repayment is therefore either taxed in the year of receipt under section 56(2)(xii) or deducted from cost, never both: the part taxed does not reduce cost, and the part not taxed does. Explanation 2 applies the same reduction where a unit's cost is carried over under section 49 after a transaction not regarded as a transfer.
5. Anticipatory Legal Analysis -- The Implementation Issues
Prospective Interpretation Clause (xii) of section 56(2) and section 115UA(3A) were inserted by the Finance Act, 2023 with effect from 1 April 2024, and no Tribunal decision on them has been traced. Likely interpretive issues -- (i) Tracking the running total -- item A of the formula in section 56(2)(xii) counts every such distribution on the unit since issue, including those paid to earlier holders, so a buyer in the market needs the trust's per-unit history, not only his own receipts. (ii) The benchmark is the issue price -- item B is the amount at which the trust issued the unit, not the investor's own purchase price. (iii) Until the running total passes the issue price, the debt-repayment component is not taxed under section 56(2)(xii); under Explanation 1 to section 48(ii) it instead reduces the cost of acquisition of the unit. Beyond that point it is taxed in full as income from other sources, and item C prevents the same amount being taxed twice. Section 115UA(3A) keeps this sum out of the pass-through rule in section 115UA(1). (iv) Treatment of post-1-April-2023 unit acquisitions where the unit-holder receives both pre-amendment and post-amendment distributions -- relevant because the formula in section 56(2)(xii) counts distributions made in earlier years as well. |
6. Strategic Implications for HNI REIT / InvIT Investors
- The debt-repayment component is taxed at the slab rate only once distributions on a unit pass its issue price; until then it lowers the cost of the unit and so increases the eventual capital gain.
- The eventual capital-gain on transfer remains at section 112A 12.5% (post 23 July 2024) for Long-Term -- which preserves a meaningful but smaller residual advantage.
- A per-unit record of debt-repayment receipts serves two purposes: the running total for section 56(2)(xii) and the reduced cost under Explanation 1 to section 48(ii).
7. Practitioner Documentation Discipline
- Per-trust component break-up of each distribution -- interest / dividend / rental / specified sum -- as published in the trust's quarterly distribution notice.
- Per-unit running record of debt-repayment receipts, separating the part taxed under section 56(2)(xii) from the part that reduces cost.
- Schedule OS entry in the Income Tax Return for any sum taxable under section 56(2)(xii), with the other components reported by their own character.
- Schedule CG on eventual transfer using the adjusted cost basis.
- Form 26AS / Annual Information Statement reconciliation -- ensure the trust's reporting matches the unit-holder's classification.
- Annual reconciliation between the trust's Form 26AS reflection and the unit-holder's Schedule OS / Schedule CG entries.
8. Key Takeaways
- Clause (xii) of section 56(2), from assessment year 2024-25, taxes the debt-repayment component as income from other sources once the total of such distributions on a unit since issue exceeds its issue price.
- Until then, Explanation 1 to section 48(ii) reduces the cost of the unit by the untaxed receipts; the same rupee is never both taxed and deducted from cost.
- Section 115UA(3A) takes this sum outside the pass-through rule in section 115UA(1).
- The running total counts distributions to earlier holders, and the benchmark is the issue price, not the buyer's purchase price.
- No Tribunal decision on these provisions has been traced.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.