Real Estate Investment Trusts (REITs) allow investors to participate in income-generating commercial properties, such as office buildings and shopping malls, without directly purchasing or managing real estate.
Investors can earn returns through periodic distributions as well as potential appreciation in the price of REIT units listed on stock exchanges.
However, understanding how REITs generate returns, how their distributions are taxed and what drives their performance is important before investing.
Under Securities and Exchange Board of India (SEBI) regulations, REITs must distribute at least 90% of their net distributable cash flows to unitholders at least once every six months.
According to Neeraj Toshniwal, CFO, Knowledge Realty Trust and Executive Committee Member, Indian REITs Association, all six listed REITs in India currently make quarterly distributions.
How are REIT distributions taxed?
Unlike conventional companies, which generally distribute dividends, REITs can make payouts through different components, including dividends, interest, repayment of debt by Special Purpose Vehicles (SPVs) and other income.
Each component has a different tax treatment.
Dividend income: Dividend income distributed by REITs is generally exempt in the hands of unitholders, subject to applicable provisions.
Ganesh Arunachalam, Director – Investments, Property Share, said the Taxation and Other Laws (Amendment) Act, 2026, has made this exemption unconditional, irrespective of the tax regime followed by the underlying SPV.
Interest income: This component is generally taxable at the investor’s applicable income-tax slab rate. Arunachalam said TDS is deducted at 10% for resident investors and 5% for non-residents under Section 194LBA, subject to applicable provisions.
Repayment of debt or capital: This portion is generally not taxed when received but reduces the investor’s cost of acquisition of REIT units. Consequently, it can increase capital gains when the units are eventually sold.
Nitya Yadav, Lead – Platform Strategy Architect, Integrow Asset Management, said repayment of capital has recently accounted for about half or more of distributions at several large REITs. Investors should refer to the REIT’s tax statement to understand the composition of each payout.
Other income: Its tax treatment depends on the nature of the income and applicable provisions. Arunachalam said residual operational income from underlying SPVs is taxed at the REIT level at the maximum marginal rate before distribution.
Capital gains on sale of units: Listed REIT units held for more than 12 months are generally classified as long-term capital assets, with eligible gains taxed at 12.5%. Units held for 12 months or less are generally classified as short-term capital assets, with eligible gains taxed at 20%, subject to applicable provisions.
Abhishek Agrawal, CFO of Embassy Office Parks REIT, said investors should understand the individual components of distributions rather than treating the entire payout as a single source of income. He also emphasised evaluating returns after tax, based on individual tax circumstances.
What should investors assess before investing in REITs?
REIT performance depends on the rental income generated by its properties, tenant demand, financing costs and property valuations. Experts identify four important parameters investors should examine.
Occupancy levels and tenant profile
Occupancy indicates the proportion of available property space that is leased and generating rental income. Investors should also examine tenant quality, concentration and lease duration.
Yadav said occupancy can vary across cities and individual buildings, making it important to look beyond the overall portfolio figure. She also highlighted the importance of understanding how much rental income comes from a handful of tenants.
Agrawal said tenant quality and lease duration influence the stability of rental income. Investors can also examine Weighted Average Lease Expiry (WALE), which indicates the average remaining lease duration across a REIT’s portfolio.
Rental income and lease renewals
Rental growth depends on existing lease agreements, contractual rent escalations and the ability to renew leases at prevailing market rates.
Arunachalam said investors should examine rental escalations, market rental trends and rental reversion, which indicates the potential difference between existing rents and prevailing market rents.
Yadav also advised checking lease expiry schedules and the rental rates achieved in recent renewals.
Interest rates and debt levels
Interest rate movements can affect REITs by changing borrowing costs and the relative attractiveness of their distributions compared with other interest-bearing investments.
Yadav said investors should examine the amount of debt and its refinancing schedule, particularly borrowings due for renewal over the next two years.
Arunachalam said investors should assess the REIT’s leverage and whether growth in cash flows can offset an increase in financing costs. Agrawal also highlighted the importance of understanding total debt and applicable borrowing rates.
Property valuations and total returns
Property valuations depend on factors such as location, rental expectations, demand for commercial space and prevailing market conditions.
Yadav said REIT properties are independently valued at least twice a year, with valuations based on assumptions about future rental income and capitalisation rates. The market price of REIT units may differ from the reported value of their underlying assets.
Toshniwal said investors should evaluate REITs on total returns, comprising distributions and potential capital appreciation, rather than relying only on distribution yield.
He also pointed out that distributions can fluctuate depending on rental income, operating expenses, interest costs and other business factors.
What should retail investors keep in mind?
REITs offer an avenue to participate in commercial real estate through listed units, without directly owning or managing properties. Their returns depend on the performance of the underlying assets, rental income, financing costs and changes in unit prices.
Investors should understand the tax treatment of different distribution components and assess occupancy, tenant profile, lease arrangements, debt levels and property valuations.
Looking at post-tax total returns, rather than distribution yield alone, can provide a more complete picture of a REIT investment.
NOTE TO READERS
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers should consult certified experts before making any investment decisions.