Archive / Investment Adviser (Level 2) / Taxation of Other Products

nism-series-xb-reit-invit-dividend-tax-free-condition-115baa[ INVESTMENT ADVISER (LEVEL 2) ]

Under Section 10(23FC) and Section 115UA, under what condition is the 'Dividend Component' received by a unitholder from a REIT / InvIT 100% TAX-FREE in unitholder hands?

[ A ]If the unitholder is a registered student.

[ B ]If the underlying Special Purpose Vehicle (SPV) distributing the dividend has NOT opted for the concessional 22% corporate tax regime under Section 115BAA (i.e. SPV paid full standard corporate taxes).[ CORRECT ]

[ C ]REIT dividends are always 100% tax-free under all circumstances.

[ D ]If the REIT owns only residential houses.

Takeaway

The correct answer is B: the REIT/InvIT dividend component is 100% tax-free in unitholder hands only when the underlying SPV has NOT opted for the concessional 22% corporate tax rate under Section 115BAA -- meaning the SPV already paid full standard corporate tax.

Derivation

REIT/InvIT structures are pass-through vehicles: income earned by the underlying Special Purpose Vehicle flows to unitholders through several distinct components (interest, dividend, rental income, capital repayment), each carrying its own tax treatment under Sections 10(23FC) and 115UA. The dividend leg's exemption is conditional, not automatic -- it hinges on whether the SPV itself already bore full corporate tax. If the SPV instead availed the lower 22% concessional regime under Section 115BAA, that dividend income was undertaxed at the SPV level, so Parliament made it taxable again when it reaches the unitholder, preserving overall tax parity.

Why the others fail

A — If the unitholder is a registered student.

Fabricated and irrelevant criterion; student registration status has no bearing on the statutory SPV tax-regime test under Section 115BAA.

C — REIT dividends are always 100% tax-free under all circumstances.

Overstates the rule; REIT dividends are conditionally tax-free depending on the SPV's tax regime, not unconditionally tax-free in all cases.

D — If the REIT owns only residential houses.

Fabricated condition; the exemption depends on the SPV's corporate tax regime choice, not on the type of underlying real estate asset.