Taxability of Income of Unit Holders of Business Trust

The Concept of Business Trust was introduced in India vide the Finance Act’2014 by the Finance Minister Shri Arun Jaitley.  The business trusts operate as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). REIT is a trust that owns and manages income generating developed properties like warehouses, hospitals, shopping centers, hotels, and even timberlands. InvIT makes direct investment in infrastructure facilities which are yielding income like Toll Road, Railways, Inland waterways, Airport, Urban public transport. The units of REITs & InvITs are to be compulsorily listed on the Stock Exchange in India.

At present, there are only InvITs active in India. Practically the concept of Business Trust was implemented in the Financial Year 2017-18 when the InvITs went public.

As on 15 March’2019, the following are the Registered Infrastructure Investment Trusts in India. 

REIT is an investment tool that owns and operates rent-yielding real estate assets. The Blackstone-backed Embassy Office Parks REIT is the first ever Real Estate Investment Trust of India. It will allow individual investors to invest in using this platform and earn income. The initial public offering (IPO) of Embassy Office Parks REIT will open on the 18th March’2019. It is India’s first ever real estate investment trust listing.

Taxability in hands of Unit holders of Business Trusts

The people have invested in the units of business trusts on which they have received the returns during the Financial Year 2018-19. They need to plan their taxes for the F.Y. 2018-19 accordingly. It is for the first time for many taxpayers who are dealing with such income in their Income Tax Return. We have discussed in this blog how the unit holders have to deal with the income received from business trusts in their tax returns

The income of unit holders of Business Trust can be categorized into two parts.

1. Tax on Income Distributed by Business Trust.
2. Tax on Income on Sale of Units i.e. Capital Gains Income.

1. Tax on Income Distributed by Business Trust

There is a special taxation regime for taxability of income distributed by such business trust in the hands of the unit holders. The income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holders, as it had been received by, or accrued to the business trust.

The person distributing the income on behalf of the business trust is required to furnish the statement of income distributed to the unit holder in Form No. 64B by the 30th June. Thus, the Form No. 64B showing the details of distributed income during the F.Y. 2018-19 will be furnished to the unit holders by the 30th June’2019.

Example, Mr. Tarun, a resident individual, has received the following ‘Form 64B – Statement of income distributed by a business trust to the unit holders’ for the Financial Year 2018-19.

Let’s see how taxability of each of such income will be determined in the hands of Mr. Tarun.

Income in the nature of Interest

The income in the nature of interest referred to in sub clause (a) of Section 10(23FC) is chargeable to tax in the hands of the unit holders. If the unit holder is non-resident the rate of tax on such income is 5% and for resident unit holders, it is chargeable to tax at slab rates.

This income is exempt in the hands of the business trust. This interest received or receivable from a special purpose vehicle by the business trust is accorded a pass-through treatment and is taxable directly in the hands of the unit holders. The business trust is liable to deduct TDS on this interest income at the rate of 10% in the case of a resident unit holder and 5% in the case of Non-resident unit holders.

Example, Mr. Tarun has to include the income of Rs. 30,000 distributed by the business trust on 25/10/2018 as an interest income in his Income Tax Return.

Rental Income

The rental income referred to in Section 10(23FCA) is taxable income in the hands of the unit holders.

Any income of a business trust, being a real estate investment trust, by way of renting or leasing or letting out any real estate asset owned directly by such business trust is exempt in the hands of the business trust. This income is chargeable to tax in the hands of the unit holders as rental income. The REIT is liable to deduct TDS on such distributed income at the rate of 10% for resident unit holders and at the rates in force for non-resident unit holders.

Example, Mr. Tarun has to show the income of Rs. 25,000 distributed on 16/11/2018 by the business trust as rental income in his Income Tax Return.

Dividend Income

This dividend component of the income distributed by the business trust is exempt in the hands of the unit holder. The business trust is also provided an exemption in respect of such income.

Example, The income of Rs. 27,000 received by Mr. Tarun on 16/11/2018 in the nature of Dividend referred to in Section 115-O is exempt in his hands.

Any Other Income

Any distributed income, referred to in section 115UA, received by a unit holder from the business trust is exempt in the hands of the unit holder under Section 10(23FD).

Example, The income of Rs. 20,000 received on 25/10/2018 and Rs. 23,000 received on 16/11/2018 is exempt in the hands of Mr. Tarun.

2. Tax on Income on Sale of Units i.e. Capital Gains Income

The profit from the sale of the units of the business trust is chargeable to tax under the head capital gains. The tax treatment will differ for Short-term capital gains and long-term Capital gains. The period of holding of the units of the business trust to qualify as a long-term capital asset is more than 36 months.

Short-Term Capital Gain

The short-term capital gains on which STT is paid is chargeable to tax at the rate of 15% as per section 111A. The deductions under Chapter VI-A are not allowed from such capital gains.

Long-Term Capital Gain

The long-term capital gains on which STT is paid were exempt in the hands of the Unit holders under Section 10(38) till the A.Y. 2018-19.

Exemption for long-term capital gains arising from the transfer of units of business trust has been withdrawn by the Finance Act, 2018 w.e.f. Assessment Year 2019-20 and a new section 112A is introduced in the Income-tax Act.

As per Section 112A, long-term capital gains arising from the transfer of a unit of a business trust shall be taxed at 10% (without giving the benefit of indexation). The tax on capital gains shall be levied in excess of Rs. 1 lakh. The deductions under Chapter VI-A are not allowed from such capital gains.