Moment guide · FY 2026-27

I hold REIT or InvIT units

How are REIT and InvIT distributions taxed?

Sec 194LBASec 112ASec 111ASec 48Verified 2026-08-11

A REIT or InvIT distribution is split into interest (taxed at your slab rate), dividend (taxed as dividend with 10% TDS under section 194LBA) and return of capital (which reduces your cost of units, not income). Selling units held over 12 months gives LTCG at 12.5%, and within 12 months STCG at 20%, with no ₹1.25 lakh exemption for these units.

Your legitimate options

Every route the statute actually gives you — with its condition, cap and deadline.

Route	Condition	Cap / deadline
Distribution components	Dividend portion taxed as dividend (10% TDS u/s 194LBA), interest portion at your slab rate, return of capital reduces your cost	Each distribution is split into components by the REIT
Sale of units — LTCG	Held more than 12 months (listed on exchange) — LTCG at 12.5% u/s 112A	₹1.25L exemption does NOT apply to REIT/InvIT units
Sale of units — STCG	Held 12 months or less — 20% u/s 111A as listed security	20% flat

The #1 trap

Treating every distribution as 'dividend income' — a REIT/InvIT payout is split into interest, dividend and return-of-capital components, each taxed differently, and the return of capital is not income at all but a reduction of your cost basis. Also, the ₹1.25 lakh exemption does not cover REIT/InvIT units even though they are listed and use section 112A mechanics.

The decision path

Follow it top to bottom — the first condition that matches is your answer.

IF you receive a REIT/InvIT distribution → split it into interest, dividend and return-of-capital components.
IF the component is interest → tax it at your slab rate; the REIT deducts TDS u/s 194LBA.
IF the component is dividend → tax it as dividend income with 10% TDS already deducted.
IF the component is return of capital → reduce your cost of acquisition; it is not income.
IF you sell units held over 12 months → LTCG at 12.5% u/s 112A without the ₹1.25L exemption.
IF you sell within 12 months → STCG at 20% u/s 111A. [VERDICT: read the distribution break-up before reporting.]

Worked example

Kavita, investor holding units of a listed REIT

Kavita bought 10,000 units of a listed REIT in 2022 at ₹110 per unit, paying ₹11,00,000. In FY 2025-26 she receives a distribution of ₹8 per unit, which is ₹80,000 in total. The REIT's communication breaks this down: 60% is interest income from the underlying rental SPVs, 25% is dividend and 15% is return of capital. The interest component is ₹48,000, taxable at her slab rate. The dividend component is ₹20,000, taxable as dividend income, and the REIT deducted 10% TDS under section 194LBA, which is ₹2,000, appearing in her Form 26AS. The return of capital is ₹12,000, which is not income at all — it reduces her cost of acquisition from ₹11,00,000 to ₹10,88,000. In 2026 she sells all 10,000 units at ₹125 per unit, receiving ₹12,50,000. Her adjusted cost is ₹10,88,000, so her capital gain is ₹12,50,000 minus ₹10,88,000, which is ₹1,62,000. Because she held the units for more than 12 months and the units are listed, the gain is long-term under section 112A, taxed at 12.5%, giving ₹20,250 before surcharge and cess. The ₹1.25 lakh annual exemption does not apply to REIT and InvIT units — a fact many investors discover only at filing — so the full ₹1,62,000 is taxable. If she had sold within 12 months, the gain would be short-term at 20% under section 111A. Kavita keeps the distribution statements from the REIT, which show the component break-up, and the broker statement for the sale. A quick call with us dials in the final figure. Kavita also checks the REIT's annual statement, which gives the component split for each distribution, because the interest and dividend portions are reported under different heads and the return asks for them separately. The interest component is taxable at her slab even if the REIT is listed, and the dividend component carries its own 10% TDS under 194LBA, which she verifies against Form 26AS. If she holds the units in a Demat account and sells some on the exchange, the brokerage reduces the net proceeds but the gain computation uses the gross sale price for the section 112A schedule. The return-of-capital component reduces her cost but does not reduce the number of units, so her future gains are computed against the adjusted cost. A quick call with us dials in the final figure.

Claims influencers make about this moment

Trap“REIT and InvIT distributions are fully tax-free like dividends”

Questions people actually ask

How is a REIT distribution taxed?

It is split into interest (slab rate), dividend (10% TDS u/s 194LBA) and return of capital (reduces your cost, not income). Report each component separately.

What is the capital gains rate on REIT units?

Listed REIT/InvIT units held over 12 months: LTCG at 12.5% under section 112A. Within 12 months: STCG at 20% under section 111A.

Does the ₹1.25 lakh exemption apply to REITs?

No — the ₹1.25 lakh exemption does not cover REIT or InvIT units, even though they are listed and use section 112A rates.

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Sections: 194LBA, 112A, 111A, 48 · Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).