REIT and InvIT tax issues that NRIs face

The Taxation and Other Laws (Amendment) Act, 2026 (TOLA 2026) was passed on August 17, 2026, and addressed a long-standing issue concerning dividend income from REITs and InvITs, also known as BTs. These structures hold their rental or cash-generating assets through Special Purpose Vehicles (SPVs) or through intermediate holding companies that own the SPVs. They enjoyed pass-through treatment and dividend income was entirely exempt from taxation since 2016, making them efficient investment vehicles.

However, in 2020, a conditional tax regime was introduced for dividends distributed by BTs, depending on the corporate tax regime chosen by the SPV. If the SPV opted for a regular regime (30%), the dividend income was exempt in the hands of the unitholder. But if the SPV migrated to the concessional tax regime (22%), the exemption was lost, and accumulated MAT credit was also forfeited. This forced many BTs to remain under the old taxation regime.

TOLA 2026 resolved this issue by making the dividend exemption unconditional for unitholders, regardless of the tax regime chosen by the SPV. However, it did not amend the withholding tax machinery alongside that exemption. Consequently, unitholders can now enjoy a substantial exemption from dividends, but the corresponding TDS rules haven't changed.

This mismatch could lead to non-resident unitholders claiming refunds for taxes withheld on exempt dividend income even though they may not have any independent tax liability in India.

Trustees are unlikely to stop withholding tax on dividend income from SPVs in the concessional regime, fearing a dispute and subsequent penalties, interest, and penalties. The compliance burden is transferred to the non-resident unitholders, who may need to file a tax return to claim refunds for taxes withheld on exempt dividend income.