What you will learn: what you own when you buy a REIT unit, the SEBI rules that shape REITs and small and medium REITs, where each part of a distribution comes from, how interest, dividend, rent and repayment of capital are taxed in tax year 2026–27, and the risks the yield figure hides.
Ananya Rao (an illustrative profile), 34, works in Bengaluru and rents her flat. She likes the idea of owning a slice of large office parks without buying a flat, and a listed REIT shows a distribution yield of about 6.3%, against 7% on her bank FD. Her real question: is this a property-backed FD, what is the payout made of, and what tax will I pay on it?
What a REIT is
A real estate investment trust (REIT) is a trust, registered with SEBI, that pools investors' money to own income-producing real estate, mostly completed office parks, malls and similar commercial property. The assets usually sit in companies called special purpose vehicles (SPVs), sometimes through a holding company, which the REIT owns and lends money to. Four parties run it: the sponsor who set it up and keeps a stake, the manager who runs the properties and the trust, the trustee who holds the assets for unit holders, and an independent valuer who values the properties at least once a year.
You buy units of the trust, which are listed and traded on stock exchanges through a demat account. You do not own any particular floor or building, you cannot redeem units with the REIT the way you redeem mutual fund units, and the unit price is set by buyers and sellers each day. That price can move well above or below the latest valuation of the properties.
The rules that shape a REIT
SEBI's REIT Regulations, 2014, as amended up to 18 April 2026, set the main rules. Since 2024 they also cover small and medium REITs (SM REITs), which run separate schemes owning smaller assets; this is also the framework under which fractional-ownership platforms for commercial property are now regulated.
| Rule | REIT | SM REIT scheme |
|---|---|---|
| Minimum investment in a public issue | ₹10,000 to ₹15,000 | ₹10 lakh |
| Trading on the exchange | Trading lot of one unit | Units listed; check the scheme's lot size |
| Asset size | REIT assets of at least ₹500 crore at the initial offer | At least ₹50 crore and less than ₹500 crore per scheme |
| What it may own | At least 80% of value in completed, rent- or income-generating property | At least 95% in completed, revenue-generating property; no under-construction assets |
| Payout | At least 90% of net distributable cash flows, declared at least once every six months | 100% of the scheme's net distributable cash flows, declared at least every quarter |
| Borrowing | Net borrowings capped at 49% of asset value; above 25% needs a credit rating and unit holder approval | Net borrowings capped at 49% of scheme assets, with similar conditions above 25% |
"At least 90% of net distributable cash flows" is a rule about passing cash through, not a promised amount. If rents fall, vacancies rise or interest costs go up, the cash available falls and so does the distribution.
Where a distribution comes from
Tenants pay rent to the SPVs. Each SPV pays its operating costs and taxes, then passes cash up to the REIT in three ways: interest on the loans the REIT has given it, dividends on the shares the REIT holds, and repayment of those loans. If the REIT owns some property directly, it also receives rent itself. The REIT then distributes to unit holders, and each distribution notice states how much of it is interest, dividend, rental income and repayment of capital (sometimes described as repayment of debt or "other income"). These labels are not cosmetic: each is taxed differently.
For most REITs, the repayment-of-loan part is still paid out of rental cash flow; the buildings remain. It is called repayment because of how money moves inside the group, so the yield does not fall just because some of it is labelled capital. For infrastructure trusts with assets that expire, the story is different, as InvITs explained shows.
How each part is taxed in tax year 2026–27
Under the Income-tax Act, 2025, a business trust's distribution keeps the character it had when the trust received it, and the trust must give you a statement of that breakdown.
| Component | Tax in your hands |
|---|---|
| Interest (from SPV loans) | Taxable at your slab rate |
| Dividend (from SPV shares) | Generally exempt. As originally enacted, the Income-tax Act, 2025 taxed this part at your slab when the SPV had opted for the concessional company tax rate. An amendment passed by Parliament in August 2026 removes that condition, reportedly from 1 April 2026, so the dividend part should now be exempt in all cases; confirm the current position and the trust's statement before filing |
| Rental income (property the REIT owns directly) | Taxable in your hands |
| Repayment of capital and other sums | Not taxed until the total of such amounts received on a unit exceeds the price at which the REIT originally issued that unit; the excess is then taxed as income from other sources |
| Gain on selling units on the exchange | Held more than 12 months: long-term, 12.5% on gains above ₹1.25 lakh a year (shared with listed equity gains). Held 12 months or less: short-term, 20%. Plus cess |
The repayment rule uses the original issue price, not what you paid on the exchange. How exactly the running total is counted for a unit that changed hands is a point to confirm with a tax professional if the amounts are large. Interest and distribution reporting in your return is covered in interest, distributions and TDS.
Worked example: Ananya's 400 units
Assumptions (illustrative, not any REIT's actual figures): 400 units bought at ₹350 on the exchange, so ₹1,40,000 invested; brokerage ignored; distributions of ₹22 a unit a year, split ₹8 interest, ₹5 dividend and ₹9 repayment of capital; the REIT's original issue price was ₹300; the dividend part is treated as exempt, as explained above; Ananya pays tax at 30% plus 4% cess (31.2%).
- Cash received in a year: 400 × ₹22 = ₹8,800, a distribution yield of 6.29% on her price.
- Interest part: 400 × ₹8 = ₹3,200, taxed at 31.2%: ₹998.
- Dividend part: ₹2,000, treated as exempt.
- Repayment part: ₹3,600, not taxed this year. At ₹9 a unit a year it would take about 33 years for the running total to pass the ₹300 issue price.
- Kept after tax: ₹7,802, or 5.57% of her ₹1,40,000.
Compare her FD: 7% taxed at 31.2% leaves 4.82%, or ₹6,742 on the same amount. For someone in the 5% slab, the REIT's post-tax yield would be about 6.17%, because only the interest part is taxed and at a low rate. But the REIT is not an FD. If the unit price falls 10% in a year, Ananya's total return for that year is the ₹22 distribution minus a ₹35 price fall: about −3.7%. If it rises 5%, the year's return is about 11.3%. The distribution itself can also be cut.
If she sells after three years at ₹380, her gain is 400 × ₹30 = ₹12,000, long-term, and tax-free if her total long-term gains on listed shares, equity funds and business trust units stay within ₹1.25 lakh that year.
The risks behind the yield
- Occupancy and lease expiries. Distributions depend on tenants renewing. Look at occupancy, the weighted average lease expiry and how much rent is due for renewal in the next few years.
- Tenant and location concentration. A few large tenants, one city or one sector of tenants can dominate rent.
- Interest rates and borrowing. Higher rates raise interest costs and tend to pull unit prices down, because investors compare the yield with bonds.
- Sponsor and related-party dealings. Acquisitions from the sponsor and management fees need scrutiny; the regulations require unit holder approval and valuation for many of them.
- Price versus value. Units can trade at a premium or discount to the valuer's net asset value for long periods.
- Trading liquidity. Some REITs trade thinly; SM REIT units, with a ₹10 lakh minimum, may be harder still to sell at a fair price.
- Tax and rule changes. The treatment of each component has changed more than once in recent years, most recently the dividend part in 2026, so check the current law each year.
Try this: read a REIT before you buy
- Open the last two distribution notices and note the split between interest, dividend, rental income and repayment of capital.
- From the latest quarterly presentation, note occupancy, lease expiry profile, top tenants' share of rent and net borrowings as a share of asset value.
- Compare the unit price with the latest net asset value per unit.
- Work out your own post-tax yield using your slab, as in the example, and write down what a 10% price fall would do to the year's return.
- Keep each year's statement of income components for your return.
Common questions
Can the REIT stop paying distributions?
It must distribute at least 90% of the net distributable cash flows it generates, at least once every six months. If cash flows fall, the payout falls with them; there is no fixed amount.
Is a REIT the same as owning a flat?
No. You own units of a trust holding commercial property, mostly offices and malls, run by professionals, with no stamp duty, small ticket sizes and daily trading. You also have no control over the property and face stock-market price swings. The flat side of that comparison is in property as an investment.
Why is part of my distribution not taxed at all?
The dividend part is generally exempt (see the tax table for the 2026 change), and the repayment-of-capital part is not taxed until the total received on a unit passes its original issue price. The interest part, and any rental part, is taxed at your slab.
Are SM REITs suitable for small investors?
They are designed for larger tickets: the minimum investment is ₹10 lakh per scheme, each scheme may hold only a few assets, and trading can be thin. Read the scheme offer document's asset and tenant details closely.
Where to go next
- InvITs explained: the same trust structure for roads, power lines and pipelines, with finite-life assets.
- Real assets vs a liquid portfolio: where REITs fit beside a flat, gold and funds in one household.
- How the stock market works: buying, selling and settlement of listed units.
- Further reading: fractional real estate: benefits, tax and risks.