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Business News/ Market / Stock-market-news/  Clarity on Reits’ taxes; more funds for low-cost housing
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Clarity on Reits’ taxes; more funds for low-cost housing

Removal of dividend distribution tax on Reits makes them more attractive. A similar structure for infrastructure projects is also proposed

As an investment product in India, Reits will give a boost to the liquidity situation of developers, who have been struggling to find funds for construction activities. Photo: MintPremium
As an investment product in India, Reits will give a boost to the liquidity situation of developers, who have been struggling to find funds for construction activities. Photo: Mint

Finally, there is clarity on the tax treatment of income from real estate investment trusts (Reits). In Budget 2014, Reits have been given a pass-through for taxation purposes.

Reits have been a conversation point since 2008 but it was only in October 2013 that a draft guideline was issued. The real estate industry was hoping for some positive development in terms of taxation in this sector.

“It is a positive and long awaited move. The commercial space has been cash starved and this will trigger listings by the end of the year," said Somy Thomas, executive director-consultation, valuation and advisory, Cushman and Wakefield.

As an investment product in India, Reits will give a boost to the liquidity situation of developers, who have been struggling to find funds for construction activities.

Under Reits, money is pooled from a set of investors and invested in income-producing real estate assets. Whatever is the income, 90% of it is given to investors.

However, till now, the tax treatment was not clear and a Reit would have been taxed twice—once as corporate income tax and the second time as dividend distribution tax (DDT).

With the tax pass-through, DDT will not be applicable. Instead, the recipients of dividends, i.e the Reit investors, will pay as per their tax slabs.

This will also open up an alternate avenue for investment, not only for high net worth individuals but also for retail investors. “Post-leakages (various charges, taxes, and so on), one can expect 8-9% returns from Reits. And not to forget the capital appreciation of the asset itself in which the investment has been made," said Thomas.

Compared with other investment products, such as Public Provident Fund, which is offering 8.5% for the financial year 2014, the returns from Reits will definitely be competitive. However, it scores more when we factor in the capital appreciation of the asset.

“Investing in Reits and its new tax structure will help investors to bring in efficiency in terms of diversification and also in tax planning," said Rakesh Nangia, managing partner, Nangia & Co., a chartered accountancy firm.

The finance minster, Arun Jaitely, also announced a modified Reit structure for infrastructure projects, called infrastructure investment trusts. These will also have pass-through status and will be applicable for public-private-partnership projects and other infrastructure projects as well.

In another push to the real estate sector, the government has proposed to reduce the built-up area for developments from 50,000 sq. mt to 20,000 sq. mt, and minimum capital from $10 million to $5 million with a three-year post-completion lock-in for foreign direct investment. This will be helpful in developing the 100 smart cities as envisaged in the budget.

The government has also allocated 4,000 crore for National Housing Bank to enable cheaper housing credit for the economically weaker sections of society.

Putting all these announcements together, the government seems keen to fulfill its endeavour to provide housing to everyone by the year 2022 and make the sector attractive for investors.

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Published: 10 Jul 2014, 08:08 PM IST
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