What is business trust?
A business trust is generally formed as a trust structure rather than a company. It pools capital from investors and invests in income-generating assets like real estate or infrastructure projects. Examples include:
A business trust is a legal arrangement in which a trustee operates a business for the benefit of its beneficiaries. In the context of income tax, the treatment of business trusts differs based on the country's tax laws, but I'll give you a detailed overview primarily from an Indian Income Tax and general international perspective.
- Real Estate Investment Trusts (REITs)
- Infrastructure Investment Trusts (InvITs)
REAL ESTATE INVESTMENT TRUST (REIT)
A Real Estate Investment Trust (REIT) is a company or trust that owns, operates, or finances income-generating real estate. REITs pool capital from multiple investors to invest in a diversified portfolio of real estate assets such as commercial buildings, malls, hotels, apartments, and warehouses.
Key Features of REITs
|
Feature |
Description |
|
|
Structure |
Trust registered with a regulatory body (e.g., SEBI in India, SEC in the US) |
|
|
Investors |
Retail and institutional investors |
|
|
Assets |
Income-generating real estate (offices, malls, warehouses, etc.) |
|
|
Returns |
Distributed in the form of dividends and capital appreciation |
|
|
Liquidity |
Publicly listed REITs are traded on stock exchanges |
|
|
Minimum Investment (India) |
Rs 10,000-Rs 15,000 (as of latest SEBI guidelines) |
|
Taxation of REITs (India - Under Income Tax Act,1961)
REITs in India are governed by:
- SEBI (REIT) Regulations, 2014
- Income Tax Act, 1961
1. Taxation at REIT Level
|
Income Type |
Taxability at REIT Level |
|
Interest from SPV |
Exempt |
|
Dividend from SPV |
Exempt, subject to SPV not opting for concessional tax regime (Sec 115BAA) |
|
Rental Income |
Taxable in the hands of the REIT |
|
Capital Gains |
On sale of assets: taxable |
2. Taxation in Hands of Unit Holders
|
Income Received |
Resident Unit Holder |
Non-Resident Unit Holder |
|
Interest Income |
Taxable, TDS @10% |
Taxable, TDS @5% (Sec 194LBA) |
|
Dividend Income |
Taxable (if SPV opted for 115BAA), TDS @10% |
TDS @10% |
|
Rental Income |
Taxable in the hands of REIT; not passed on |
|
|
Capital Gains on Sale of REIT Units |
STCG @15% (if listed) LTCG @10% (> Rs 1 lakh gain) |
Same as residents (with applicable treaty benefits) |
SPV = Special Purpose Vehicle (companies through which REITs hold assets)
Conditions for REITs in India
- Must distribute at least 90% of net distributable cash flows to unit holders.
- Must invest at least 80% of its assets in completed, revenue-generating properties.
- Leverage (debt) capped at 49% of asset value.
- Must be registered with SEBI.
INFRASTRUCTURE INVESTMENT TRUST (InviT)
An Infrastructure Investment Trust (InvIT) is a business trust regulated by SEBI that enables individual and institutional investors to invest in infrastructure assets and earn regular income. Like REITs (which focus on real estate), InvITs are designed for the infrastructure sector, such as roads, power transmission lines, telecom towers, gas pipelines, etc.
Key Features of InvITs
|
Feature |
Description |
|
Structure |
Organized as a trust under SEBI regulations, comprising a Sponsor, Trustee, Investment Manager, and Project Manager. |
|
Regulation |
Regulated by SEBI (Infrastructure Investment Trusts) Regulations, 2014. |
|
Purpose |
To pool capital from investors to invest in income-generating infrastructure assets (e.g., roads, power transmission, telecom towers). |
|
Asset Ownership |
Typically holds controlling interest in Special Purpose Vehicles (SPVs) that own/operate infrastructure assets. |
|
Minimum Investment |
For public InvITs: Rs 10,000-Rs 15,000 (as revised by SEBI); earlier Rs 1 lakh minimum. |
Types of InvITs
- Public InvITs - Listed on stock exchanges; open to retail and institutional investors.
- Private InvITs - Not listed; typically for institutional and HNI investors.
Taxation of InvITs (India - Under Income Tax Act, 1961)
1. Tax at InvIT Level
|
Income Source |
Taxability at InvIT Level |
|
Interest from SPV |
Exempt |
|
Dividend from SPV |
Exempt, if SPV hasn't opted for 22% tax under Sec 115BAA |
|
Capital Gains |
Taxable |
|
Rental Income |
Not applicable (infra assets typically don't involve rentals) |
2. Taxation in Hands of Unit Holders
|
Income Type |
Resident Investors |
Non-Resident Investors |
|
Interest Income |
Taxable; TDS @10% (Sec 194LBA) |
TDS @5% |
|
Dividend Income |
Taxable (if not exempt); TDS @10% |
TDS @10% |
|
Capital Gains on Units |
STCG @15% (listed units) LTCG @10% (if gain > Rs 1 lakh) |
Same as residents (with DTAA benefits) |
Key Conditions for InvITs
- Must be registered with SEBI.
- Should invest at least 80% in completed, revenue-generating infrastructure projects.
- Rs 10,000-Rs 15,000 for public InvITs; Rs 1 crore for private InvIts.
- Public InvITs must be listed on NSE/BSE within timelines.
- Assets must be independently valued annually, with half-yearly updates.
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