REITs and InvITs explained: Meaning, key features, income generation, taxation, and major differences

What if you could invest in real estate and highways at just ₹10,000? Sounds unreal!

It is possible with REITs and InvITs that allow you to invest in real estate and infrastructure properties like a stock. By purchasing the units of these instruments, you can directly own a piece of land without spending lakhs and crores of money.

Here you will find all the details of REITs and InvITs, including key features, how they work, taxation, and much more.

What are REITs vs InvITs?

(Real Estate Investment Trusts) and (Infrastructure Investment Trusts) both operate like mutual funds, in which the fund collects money from investors and invests it in real estate and infrastructure projects.

However, REITs invest in real estate projects such as offices, malls, or apartments, while InvITs invest in roads, highways, transmission lines, or pipelines.

Some examples of REITs are Knowledge Realty Trust, Embassy Office Parks REIT, and Bagmane Prime Office REIT. Some examples of InvITs include Powergrid Infrastructure Investment Trust, IRB InvIT FUND, and India Grid Trust. Currently, there are 6 REITs and 28 InVITs registered with the Securities and Exchange Board of India (Sebi).

How REITs and InvITs work?

Both REITs and INVITs are set up by sponsors, who transfer the underlying assets into a trust structure. The trust then issues units to investors, representing their ownership stake in the assets. A management company is responsible for operating and managing these assets, while trustees safeguard investor interests.

The income generated from rent, toll collections, or lease rentals is distributed among investors after deducting operational and management expenses. Investors also benefit from capital appreciation if the value of the underlying assets increases over time.

This means that they provide earnings through two ways: regular rental income/ dividends and capital appreciation.

Both REITs and InvITs are required to distribute at least 90% of their taxable income to investors in the form of dividends or distributions on a regular basis, typically every quarter.

Key features of REITs and InvITs

Here are the key features of REITs and InvITs you should know:

Low investment requirement

You can start investing in REITs and InvITs with relatively smaller amounts of ₹10,000 to ₹15,000, making exposure to real estate and infrastructure assets more accessible.

Liquidity

Since REITs and InvITs are listed on stock exchanges, you can buy or sell units on the exchange. It provides an easy exit option and better liquidity compared to physical real estate or infrastructure investments.

Investment mode

You can invest in REITs and InvITs through IPOs in the primary market, buy or sell the units on stock exchanges like shares in the secondary market, or invest in unlisted units through private placements.

Regulated structure

REITs and InvITs are regulated by Sebi, which lays down strict guidelines for their formation, disclosures, and operations.

Professional management

REITs and InvITs are managed by professional fund managers who allocate collected funds across income-generating real estate properties and infrastructure assets to generate the best returns for investors.

Diversification

REITs and InvITs offer exposure to a diversified portfolio of real estate and infrastructure assets, thereby reducing the risk as compared to investing in a single property or project.

How are incomes from REITs and InvITs taxed?

REITs and InvITs are treated as pass-through entities under the Income Tax Act when investments are routed through a Special Purpose Vehicle (SPV).

Since these trusts primarily invest through SPVs rather than directly holding assets, the income earned at the SPV level is generally passed on to investors without being taxed again at the trust level.

For investors, the taxation depends on the nature of the income received. Dividend income, interest income, and rental income are taxed according to the investor’s applicable income tax slab rates.

taxation applies when investors sell REIT or InvIT units. In the case of listed REITs and InvITs, capital gains from the sale of units within 12 months are treated as short-term capital gains and are taxed at 20%.

If the units are sold after 12 months, the gains qualify as long-term capital gains and are taxed at 12.5%, with an exemption of up to ₹1.25 lakh in a financial year.

Key differences between REITs and InvITs

Disclaimer: This is purely for educational/ informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.