[Solved] Consider the following statements Statement-I Interest income from the deposits in Infrastructure Investment Trüsts (InvlTs) distributed to their investors is exempted from tax, but the dividend is taxable. Statement II InvITs are recognized as borrowers under the Securitization and Recon-struction of Financial Assets and Enforcement of Security Interest Act,2002′. Which one of the following is correct in respect of the above Statements?

Q71. Consider the following statements

Statement-I

Interest income from the deposits in Infrastructure Investment Trüsts (InvlTs) distributed to their investors is exempted from tax, but the dividend is taxable.

Statement II

InvITs are recognized as borrowers under the Securitization and Recon-struction of Financial Assets and Enforcement of Security Interest Act,2002′.

Which one of the following is correct in respect of the above Statements?

1. Both Statement-I and Statement-II are correct and Statement—II is the correct explanation for Statement—I
2. Both Statement—I and Statement—II are correct and Statement—II is not the correct explanation for Statement—I
3. Statement—I is correct but Statement – II is incorrect.
4. Statement – I is incorrect but Statement-II is correct

Answer: 4

Statement 1 (Incorrect): Previously, only dividend income from InvITs was taxable. Budget 2023-24 changed this to tax all distributions.

Statement 2 (Correct): InvITs are indeed recognized as borrowers under the SARFAESI Act, which helps with financial asset securitization and enforcing security interests.

Changes due to Budget 2023-24:

All InvIT distributions are taxable: This includes interest income, dividend income, and rental income. Previously, only dividend income was subject to tax.

Tax implications for Investors:

Taxed at marginal income tax rate: Interest and rental income will be taxed based on the investor’s income tax slab (up to 30% for the highest bracket).

Dividend Distribution Tax (DDT): Dividend income might still be subject to DDT at 15% (subject to confirmation).

REITs

Real Estate Investment Trusts (REITs) are trusts that own and operate income-generating real estate properties. These properties include office buildings, shopping malls, hotels, residential apartments and warehouses. These trusts pool money from investors and allow them to invest in real estate assets without owning physical property by purchasing shares in the REIT.

REITs work like mutual funds as they pool money from multiple investors and these assets are managed by professional fund managers. The underlying assets in REITs are several real estate properties.

REITs are required to distribute most of their income to shareholders as dividends, which makes them an attractive investment option for investors looking for regular income. Additionally, investors also benefit from the long-term capital appreciation of the units of REITs they hold.

The REITs have to mandatorily make 80% of their total investments in rental income generating commercial properties. The remaining 20% of the assets of the trust can be held in cash, stocks, bonds or commercial properties that are under construction.

Infrastructure Investment Trusts (InvITs)

are business trusts similar to REITs. However, InvITs invest in infrastructure assets such as roads, highways, power plants, airports, and telecommunication towers, rather than real estate properties. The income generated by InVITs is from the fees paid by users of these infrastructure assets.

These assets generate cash flows for InvITs which are then distributed to the unitholders. The unitholders of InVITs receive a steady stream of income through dividends along with the long-term capital appreciation of their units.