Instead, it falls under the residual “other” category, resulting in a different capital gains tax treatment, according to a tax note issued by Edelweiss Mutual Fund.
Here’s a closer look.Why isn’t it an equity-oriented fund?
The fund house says the scheme does not satisfy the conditions for classification as an equity-oriented fund under the Income-tax Act, 2025.
Under the law, at least 65% of a fund’s investments must be in equity shares of listed domestic companies. While the scheme invests in listed real estate companies, it also has significant exposure to REIT units.
REIT units, although treated as equity instruments by SEBI for regulatory purposes, are not regarded as equity shares of domestic companies under the Income-tax Act. Consequently, they cannot be counted towards the 65% threshold.
Why doesn’t it qualify as a specified mutual fund?
The scheme also does not meet the definition of a specified mutual fund, according to the fund house.
Such funds are required to invest more than 65% of their proceeds in debt and money market instruments. Since REIT units are not classified as debt or money market instruments, the condition is not met.
As a result, the scheme is treated as an “other” mutual fund for tax purposes, the note says.
How are capital gains taxed?As per the fund house’s tax note:
- Units held for up to 24 months: Any gains are treated as short-term capital gains and taxed at the investor’s applicable income-tax slab rate.
- Units held for more than 24 months: Gains qualify as long-term capital gains and are taxed at 12.5% without indexation.
The note assumes the scheme’s units are not listed on a recognised stock exchange. It adds that if the units were listed, the holding period required for long-term capital gains would reduce to 12 months, while the applicable tax rates would remain unchanged.Will a higher REIT allocation change the tax treatment?
According to Edelweiss Mutual Fund’s tax note, no.
Increasing the scheme’s allocation to REITs would not make it an equity-oriented fund because REIT units are not considered equity shares for tax purposes. Likewise, it would not qualify as a specified mutual fund, as REITs are not debt or money market instruments.
Therefore, the scheme would continue to be taxed under the “other” category even if its REIT exposure increases, according to the fund house.
What about IDCW?
Distributions under the Income Distribution-cum-Capital Withdrawal (IDCW) option would be taxable at the investor’s applicable slab rate.
The fund house notes that 10% tax may be deducted at source where distributions to resident investors exceed ₹10,000 in a financial year.
