The Union Budget 2021 proposes to make dividend payments to Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvIT) exempt from TDS. It is also provided that advance tax liability on dividend income shall arise only after the declaration/payment of dividend. This is due to the fact that the amount of dividend income cannot be estimated correctly by the shareholders for paying advance tax. The Foreign Portfolio Investors can now avail a deduction of tax on dividend income at a lower treaty rate.
A REIT is a security like the mutual funds that make direct investments in real estate and/or mortgages. REITs are one area of the market that still offers a high-yield safe dividend. The dividend yields on an average double that those found in common stocks. The common feature of all types of REIT is that they pay dividends consisting of rental income and capital gains.
The tax treatment received by the REITs differs from a typical corporation. The dividends paid out by REITs do not qualify for favorable tax treatment and are taxed at ordinary income tax rates up to the maximum rate, whereas the dividends paid by regular corporations are taxed at a more favorable dividend rate.
The INvITs is similar to mutual funds and the REITs that enable direct investment of small amounts of money from potential individual/institutional investors in infrastructure to earn a small portion of the income as a return. It can be considered as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
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