What is business trust?
A business trust is typically formed as a trust structure, not as a company. It serves as an investment vehicle that pools capital from multiple investors to invest in income-generating assets, such as real estate or infrastructure projects. Common examples include Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
From a legal perspective, a business trust is a trust arrangement where a trustee manages the business operations and assets on behalf of the beneficiaries (investors).
REAL ESTATE INVESTMENT TRUST (REIT)
A REIT is a company or trust that owns, operates, or finances income-generating real estate. It pools money from investors—similar to mutual funds—and invests in real estate assets like office buildings, malls, hotels, warehouses, and more.
REITs in India
REITs in India are regulated by the Securities and Exchange Board of India (SEBI). The first Indian REIT (Embassy Office Parks REIT) was listed in 2019.
Key Features of Indian REITs
| Feature | Details |
|---|---|
| Structure | Trust structure |
| Sponsor | Sets up the REIT and contributes initial assets |
| Manager | SEBI-registered manager responsible for day-to-day operations |
| Trustee | Holds the assets for the benefit of unit holders |
| Minimum Public Shareholding | At least 25% post-listing |
| Distribution Requirement | At least 90% of net distributable cash flow (NDCF) to be distributed |
| Leased Area Requirement | 80% of assets must be income-generating (leased to tenants) |
| Asset Composition | At least 80% in completed, revenue-generating properties |
| Listing | On recognized Indian stock exchanges (e.g., NSE, BSE) |
Income Sources of REITs
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Rental income from leased properties
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Capital appreciation of real estate assets
-
Interest/dividends from special purpose vehicles (SPVs)
Taxation of REITs in India
| Income Type | Tax Treatment |
|---|---|
| Rental Income | Taxed in the hands of unit holders |
| Interest from SPV | Taxed in the hands of unit holders (10% for residents, 5% for non-residents) |
| Dividend from SPV | Exempt if SPV has not opted for concessional tax regime |
| Capital Gains on REIT Units | Taxed based on holding period (Short-Term: 15%, Long-Term: 10% beyond ₹1 lakh) |
Note: REITs themselves enjoy pass-through status, meaning they are not taxed at the entity level for specified income types.
REITs Internationally
| Country | Notable REIT Feature |
|---|---|
| USA | Must distribute 90% of taxable income, exempt from corporate tax if conditions met |
| Singapore (S-REIT) | Enjoys tax transparency if 90% income is distributed |
| Australia (A-REIT) | Typically structured as Managed Investment Trusts (MITs) |
| UK | Corporate tax-exempt on property income if 90% is distributed |
Advantages of Investing in REITs
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Stable income through regular dividends
-
Liquidity (listed on stock exchanges)
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Diversification of real estate portfolio
-
Professional management
-
Low entry barrier (retail investors can invest with small amounts)
Risks and Limitations
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Sensitive to interest rate changes
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Real estate market risk (vacancy, rent defaults)
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Limited capital appreciation compared to direct property investments
Taxation of REITs (India – Under Income Tax Act,1961)
REITs in India are governed by:
- SEBI (REIT) Regulations, 2014
- Income Tax Act, 1961
1. Taxation at REIT Level
| Income Type | Taxability at REIT Level |
| Interest from SPV | Exempt |
| Dividend from SPV | Exempt, subject to SPV not opting for concessional tax regime (Sec 115BAA) |
| Rental Income | Taxable in the hands of the REIT |
|
Commercial real estate
Capital Gains |
On sale of assets: taxable |
2. Taxation in Hands of Unit Holders
| Income Received | Resident Unit Holder | Non-Resident Unit Holder |
| Interest Income | Taxable, TDS @10% | Taxable, TDS @5% (Sec 194LBA) |
| Dividend Income | Taxable (if SPV opted for 115BAA), TDS @10% | TDS @10% |
| Rental Income | Taxable in the hands of REIT; not passed on | not passed on (i.e. not taxable in hands of holder) |
| Capital Gains on Sale of REIT Units | STCG @15% (if listed) LTCG @10% (> Rs 1 lakh gain) | Same as residents (with applicable treaty benefits) |
SPV = Special Purpose Vehicle (companies through which REITs hold assets)
| Country | REIT Taxation | Investor Taxation |
|---|---|---|
| USA | No corporate tax if 90% income distributed | Taxed on distributions; qualified dividends may be lower-taxed |
| Singapore | Tax-transparent if 90% income distributed | Generally exempt for individuals |
| UK | Exempt from corporation tax on property income | Dividends are taxed (subject to personal allowances) |
| Australia | Tax-transparent (MIT structure) | Taxed in hands of investors based on income type |
Summary – Indian REIT Taxation (Investor Perspective)
| Income Type | Taxable to Investor? | TDS? | Special Notes |
|---|---|---|---|
| Interest from SPV | Yes | Yes (10%/5%) | Always taxable |
| Dividend from SPV | Sometimes | Maybe | Tax-free only if SPV hasn’t opted 115BAA |
| Rental Income | No | No | Taxed at REIT level only |
| Sale of REIT Units | Yes | No TDS | STCG: 15%, LTCG: 10% beyond ₹1L |
INFRASTRUCTURE INVESTMENT TRUST (InviT)
An InvIT is a trust-based investment vehicle that allows individual and institutional investors to invest in infrastructure assets, such as roads, highways, power transmission lines, renewable energy assets, telecom towers, etc.
It is similar to a REIT (Real Estate Investment Trust) but focuses on infrastructure instead of real estate.
Structure of an InvIT
An InvIT is structured with the following key players:
| Component | Role |
|---|---|
| Sponsor | Sets up the InvIT and transfers initial assets |
| Trustee | Holds the assets for the benefit of unit holders |
| Investment Manager | Manages the assets and operations of the InvIT |
| Project Manager | Oversees execution and maintenance of infrastructure projects |
InvITs are regulated by SEBI (Infrastructure Investment Trusts) Regulations, 2014.
Types of InvITs
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Public InvITs: Listed on stock exchanges, accessible to retail investors.
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Private InvITs: Privately placed, mostly for institutional and high-net-worth investors.
Key Features of Indian InvITs
| Aspect | Details |
|---|---|
| Minimum Investment (Public InvIT) | ₹10,000–₹15,000 |
| Distribution Requirement | At least 90% of net distributable cash flows (NDCF) |
| Leverage Limit | Up to 70% of asset value (with credit rating) |
| Asset Composition | At least 80% in completed, revenue-generating infrastructure projects |
| SEBI Regulation | SEBI InvITs Regulations, 2014 (amended periodically) |
Income Sources for Unit Holders
Unit holders can receive income through:
-
Interest – from loans to SPVs
-
Dividends – from SPVs
-
Rental income (if applicable)
-
Capital appreciation – by selling InvIT units
Examples of Listed InvITs in India
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IRB InvIT – Toll road assets
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India Grid Trust (IndiGrid) – Power transmission assets
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PowerGrid Infrastructure Investment Trust (PGInvIT) – Government-backed transmission lines
InvITs Globally
InvIT-like structures exist under different names in various countries:
| Country | Equivalent Structure |
|---|---|
| USA | MLPs (Master Limited Partnerships) for energy infrastructure |
| Canada | Income Trusts (earlier popular for pipelines) |
| Singapore | Business Trusts |
| Australia | Infrastructure Funds |
Advantages of InvITs
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Stable and predictable income
-
Low-risk exposure to infrastructure
-
Liquidity (for listed InvITs)
-
Diversification of portfolio
-
Tax-efficient structure
Risks to Consider
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Regulatory risks (toll caps, power purchase agreements, etc.)
-
Interest rate sensitivity
-
Asset-specific operational risks
Types of InvITs
- Public InvITs – Listed on stock exchanges; open to retail and institutional investors.
- Private InvITs – Not listed; typically for institutional and HNI investors.
Taxation of InvITs (India – Under Income Tax Act, 1961)
1. Tax at InvIT Level
| Income Source | Taxability at InvIT Level |
| Interest from SPV | Exempt |
| Dividend from SPV | Exempt, if SPV hasn’t opted for 22% tax under Sec 115BAA |
| Capital Gains | Taxable |
| Rental Income | Not applicable (infra-assets typically don’t involve rentals) |
2. Taxation in Hands of Unit Holders
| Income Type | Resident Investors | Non-Resident Investors |
| Interest Income | Taxable; TDS @10% (Sec 194LBA) | TDS @5% |
| Dividend Income | Taxable (if not exempt); TDS @10% | TDS @10% |
| Capital Gains on Units | STCG @15% (listed units) LTCG @10% (if gain > Rs 1 lakh) | Same as residents (with DTAA benefits) |
Key Conditions for InvITs
- InvIT Must be registered with SEBI.
- InvIT Should invest at least 80% in completed and revenue-generating infrastructure projects.
- Rs 10,000-Rs 15,000 for public InvITs; Rs 1 crore for private InvIts.
- Public InvITs must be listed on NSE/BSE within timelines.
- Assets must be independently valued annually, with half-yearly updates.