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Investing in REITs as an NRI: Things to know
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Process, documentations and key considerations for investing in REITs
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Taxation of your REIT investments
The below content is purely for informational purposes and is not intended to constitute advisory of any kind. Please note, these are in-depth articles which are best viewed on large screen devices like laptops, desktops and tablets. The position reflected in this article has been updated as of October 31, 2024
Real Estate Investment Trusts (REITs) offer Non-Resident Indians (NRIs) a diversified way to invest in Indian real estate without owning or managing properties directly. This article outlines the process, taxation, and other factors to consider before investing in REITs.
Understanding REITs in India
As an NRIs, you can invest in Indian real estate market by either:
- Purchasing residential and commercial properties for personal use, business purposes, or generating rental income, or
- By investing in REITs in India. REITs function similarly to mutual funds, pooling capital from individual investors to acquire a diversified portfolio of income-generating, residential and commercial real estate assets including office buildings, apartments, and shopping centres. These entities often generate consistent income through long-term leases with established tenants, distributing rental income to shareholders.
To know more about investing in real estate market as an NRI click here.
Did you know?
Embassy Office Parks REIT, launched in 2019, was India's first REIT, in the market. Following its success, other REITs like Mindspace Business Parks REIT and Brookfield India Real Estate Trust REIT have emerged. All REITs in India must be registered with the Securities and Exchange Board of India (SEBI) and should comply with specific regulatory requirements. Please note that since 2021 the minimum investment required for REITs has been reduced from ₹2 lakh to ₹50,000.
Key considerations for NRIs investing in REITs in India
NRIs can make REIT investments through:
- An initial public offering (IPO), or
- Purchasing units in the secondary market through stock market trading.
To start investing in REITs in India as an NRI, you should:
- Be classified as an NRI and have a Permanent Account Number (PAN) card
- Have a Non-Resident External (NRE)/Non-Resident Ordinary (NRO) bank account
- Have an NRE PINS account to transact in secondary markets
- Have a demat and trading account with a registered broker or bank
- Comply with the applicable Know Your Customer (KYC) norms
For more details on REIT investments, you should contact your investment advisor.
Income flow structure for NRI Investors:
NRIs can invest in business trusts that invest in REITs. REITs use this capital to acquire real estate properties and generate rental income, which is distributed to business trusts as dividends. Additionally, interest paid on loans taken by business trusts is also distributed.
Let’s look at the tax implications for NRIs on the income generated from their REITs investments.
Please note, tables are best viewed on desktops or in landscape mode on mobile phones. On mobile phones, please swipe to view all content.
| Type of Income | Source of income | Taxability on such income |
|---|---|---|
Interest income |
This income is generated when business trust provides loan to Special Purpose Vehicle (SPV) and pass on this income to an NRI. |
It will be taxable under the head “Income from other sources” at the applicable tax rates*. Further, such income received by NRI is subject to TDS at the rate of 5% (plus applicable surcharge and cess). |
Dividend income |
When SPV distribute the income by way of dividend to business trust who pass on this income to an NRI. |
Dividend income will be exempt in the hands of an NRI if it is distributed by the SPV who has not opted for the lower tax regime under the income-tax laws. Dividend income will be taxable in the hands of an NRI at the applicable rates* if it is distributed by an SPV who has opted for the lower tax regime under income-tax laws. Further, such income received by NRI is subject to TDS at the rate of 10% (plus applicable surcharge and cess) |
Other source income |
This income is generated when business trust makes an investment other than in SPV and income is generated from those investments. |
It will be treated as exempt income in the hands of an NRI. |
Capital Gain income |
When NRI sell their investment in business trust. |
When NRI sell their business trust units, the gains are categorised as either short-term or long-term capital gains, depending on the holding period. If the units are held for more than 24 months, the gain are considered long term; otherwise, they are short term*. Long-Term Capital Gains (LTCG) on the sale of business trust units is taxed at 12.5% (plus applicable surcharge and cess) without indexation benefit. This rate applies to the gains exceeding ₹1.25 Lakh in any financial year. Short-Term Capital Gains (STCG) on the sale of REIT units is taxed at 20% (plus applicable surcharge and cess). |
Repayment of debt (Proceeds from amortisation of debt received from SPV) |
When REITs makes repayment of loan to business trust who will pass on to an NRI. |
Any sum which is received by an NRI from business trust which is not charged to tax either in the hands of an NRI or in the hands of the SPV shall be reduced from the cost of acquisition. Further, such aggregate distribution when exceeds the cost of acquisition, then such excess amount would be taxed as income from other source in the year in which such amount exceeds the cost. |
* Section 2(42A) of the Income Tax Act, as amended by the Finance Act 2024
To know more about applicable tax rate, click here.
Let’s understand this with an illustration
Scenario 1: Where repayment of debt per unit does not exceed issue price of unit.
Please note, tables are best viewed on desktops or in landscape mode on mobile phones. On mobile phones, please swipe to view all content.
| Financial Year | Particulars |
|---|---|
FY 2019-20 |
Rakesh acquired 10 units at an issue price of ₹100 per unit. |
FY 2020-21 |
Repayment of ₹5 per unit was received which is less than ₹100 per unit |
FY 2021-22 |
Another debt repayment of ₹10 per unit was received. Total sum received ₹15 (₹5 + ₹10) is still below the issue price of ₹100 per unit |
FY 2022-23 |
Another debt repayment of ₹15 per unit was received. Total sum received ₹30 (₹5 + ₹10 + ₹15) is still below the issue price of ₹100 per unit. |
FY 2023-24 |
Rakesh sold the units at ₹120 per unit. For capital gain calculation, the cost of acquisition (₹100) will be reduced by the total sum received (₹30), resulting in a capital gain of ₹50. In other words, the formula for calculating capital gains can be as follows: Taxable capital gain = Sales consideration – (purchase cost – repayment of debt) .i.e. ₹50 per unit = ₹120 per unit – (100 –(5+10+15)) per unit |
Scenario 2: When repayment of debt per unit exceeds issue price of unit
Please note, tables are best viewed on desktops or in landscape mode on mobile phones. On mobile phones, please swipe to view all content.
| Financial Year | Particulars |
|---|---|
FY 2019-20 |
Aakash acquired 10 units at an issue price of ₹100 per unit. |
FY 2020-21 |
Repayment of ₹25 per unit was received which is less than ₹100 per unit |
FY 2021-22 |
Another debt repayment of ₹30 per unit was received. Total sum received ₹55 (₹25 + ₹30) is still below the issue price of ₹100 per unit |
FY 2022-23 |
Another debt repayment of ₹35 per unit was received. Total sum received ₹90 (₹25 + ₹30 + ₹35) is still below the issue price of ₹100 per unit |
FY 2023-24 |
An additional debt repayment of ₹15 per unit was received aggregating to total repayment of ₹105 (₹25 + ₹30 + ₹35 + ₹15). Taxable other source income = repayment of debt – purchase cost .i.e. ₹5 = (₹25+ ₹30+ ₹35+ ₹15) per unit – ₹100 per unit. |
FY 2024-25 |
Aakash sold the units at ₹120 per unit. While calculating capital gains, cost would be zero as the repayment of debts has exceeded the cost. Taxable capital gain = Sales Consideration – Cost of Acquisition. .i.e. ₹120 = ₹120 – ₹0 |
Applicability of DTAA
India has Double Taxation Avoidance Agreements(DTAA) in place with various countries to avoid double taxation of income. As per the applicable DTAA, an NRI can avail lower tax rates on the above categories of income subject to conditions fulfilled as per the relevant Article of DTAA. To claim the benefits under DTAA, NRIs must furnish a Tax Residency Certificate (TRC) from the tax authorities of their country of residence and submit to the Indian tax authorities along with e-filing Form 10F on the income-tax portal.
To know more about TRC, click here.
Conclusion
REITs present an opportunity for NRIs to invest in the Indian real estate sector. They offer a potential for income, portfolio diversification, and liquidity while providing an alternative to direct property ownership. However, NRIs must take into consideration KYC and other necessary regulatory requirements, associated risks and taxation of these investments before investing in REITs. You should contact your bank or investment advisor for more details.
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The contents of this article/infographic are meant solely for informational purposes. The contents are generic in nature and are not intended to serve as a substitute for specific advice on any matter whatsoever. The information is subject to updation, completion and verification and the applicable norms may keep changing materially from time to time. This information is also not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to applicable laws or would subject ICICI Bank Limited/its affiliates to any licensing or registration requirements. ICICI Bank Limited/its affiliates and their representatives shall not be liable for any direct or indirect losses or liability incurred arising in connection with any decision taken by any person on the basis of this content. Please conduct your own due diligence and consult your financial advisor before making any decision. Terms and conditions of ICICI Bank and third parties apply. ICICI Bank is not responsible for third party services. Nothing contained herein shall constitute or be deemed to constitute an advice, invitation or solicitation to avail any products/ services of third parties.