Insights into Infrastructure Investment Trusts (InvITs): Everything You Should Understand

Insights into Infrastructure Investment Trusts (InvITs): Everything You Should Understand

Infrastructure Investment Trusts (InvITs) are a popular investment avenue for those looking to invest in the country's burgeoning infrastructure sector. But what are the tax implications for investors in InvITs in India? Here's a breakdown of the key points to consider.

Taxable Income for Investors

All income distributed by InvITs—interest, dividends, and rental income—is taxable in the hands of investors. This includes interest income, which was earlier exempt from tax but, per the 2023-24 budget changes, is now taxable for unitholders. Dividends distributed by InvITs are taxed as regular income according to the investor's applicable income tax slab rates.

Pass-Through Entities

InvITs are treated as pass-through entities, so the income earned from infrastructure projects is directly passed to investors, who bear the tax liability on this income.

Tax Considerations for Non-Resident Indians (NRIs)

NRIs benefit from concessional Tax Deducted at Source (TDS) rates on interest income under Section 194LC when earned from Indian companies through long-term foreign currency bonds or loans.

Tax Exemptions for Certain Foreign Investors

Some foreign investors like Sovereign Wealth Funds or Pension Funds investing in infrastructure may avail exemption under Section 10(23FE) of the Income-tax Act, 1961, which provides income tax exemption for specified foreign funds investing in Indian infrastructure entities, aimed at encouraging long-term foreign capital inflow.

Capital Gains Taxation

Capital gains on InvIT units will be taxed according to the normal capital gains rules applicable to mutual funds or securities, and no special pass-through exemption for capital gains applies.

Securitization and Enforcement of Security Interests

InvITs are recognized as borrowers under the SARFAESI Act, 2002, enabling securitization and enforcement of security interests by financial institutions, but this relates more to their operational/legal framework than direct investor taxation.

In summary, investors in InvITs must pay tax on all income distributed, including interest and dividends, as per normal income tax rules. NRIs benefit from concessional TDS rates on interest under certain conditions. Certain foreign institutional investors may benefit from tax exemptions under specific sections of the Income Tax Act.

This contrasts with REITs (Real Estate Investment Trusts) that offer certain dividends tax exemptions, highlighting the difference in pass-through and taxation approach between these infrastructure investment vehicles. Always consult a tax advisor to incorporate the latest rules and your specific status.

Management Structure and Operations

InvITs have a 3-tiered management structure consisting of a sponsor, manager, and trustee. They are typically formed by a sponsor, who appoints a trustee, sets up a trust (often in the form of a special purpose vehicle), and appoints managers (investment manager and project manager).

Cash Flows and Market Fluctuations

In FY 2020, IRB InvIT received over Rs. 7,800 crores in cash inflows and after deducting outflows of over Rs. 1,743 crores, the net distributable cash flow was just over Rs. 6,000 crores. Units of InvITs can be traded on stock exchanges similar to shares, making them subject to market fluctuations and liquidity concerns.

The Difference with REITs

While InvITs can be confused with REITs (Real Estate Investment Trusts), the basic structure and operations are similar, but the investing style differs. The main objective of InvITs is to facilitate investment in the infrastructure sector and distribute a significant portion of income to unit holders as dividends.

Investors in mutual funds might find it worthwhile to explore capital gains taxations on InvIT units, as they would be taxed according to the normal capital gains rules applicable to mutual funds or securities. Moreover, exploring real-estate investments through InvITs could offer an opportunity to invest in the infrastructure sector, differentiating from traditional investments in real-estate through REITs, which often provide certain dividend tax exemptions.

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