Section 194LBA – Income from Units of Business Trust: Understanding TDS for InvITs & REITs
The Indian capital markets have seen the introduction of innovative investment vehicles like Business Trusts, specifically Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These trusts allow investors to pool capital to invest in income-generating real estate or infrastructure assets, offering regular distributions and potential capital appreciation. To streamline the taxation of income distributed by these trusts to their unitholders, Section 194LBA was introduced in the Income Tax Act, 1961. This section mandates Tax Deducted at Source (TDS) on certain types of income distributed by business trusts.
What are Business Trusts (REITs & InvITs)?
Business Trusts are regulated entities that primarily invest in income-generating assets. They are structured to enable smaller investors to participate in large-scale real estate or infrastructure projects that would otherwise require substantial capital. The key objective is to pass through income generated by these assets to their unitholders with minimal double taxation. These trusts include:
- Real Estate Investment Trusts (REITs): These trusts primarily invest in revenue-generating real estate properties such as commercial buildings, shopping malls, and warehouses.
- Infrastructure Investment Trusts (InvITs): These trusts invest in infrastructure projects like roads, power transmission lines, pipelines, etc., that generate long-term stable income.
Applicability of Section 194LBA
Section 194LBA applies to any business trust responsible for paying income to its unitholders. The TDS provisions cover the following types of income distributed by a business trust:
- Interest income received by the business trust from a Special Purpose Vehicle (SPV), which is then distributed to unitholders.
- Dividend income received by the business trust from an SPV, which is then distributed to unitholders, if the dividend is taxable in the hands of the unitholders.
- Rental income from real estate assets (for REITs) or income from operating infrastructure assets (for InvITs) which is distributed to unitholders, to the extent it is not taxable in the hands of the business trust.
The core principle behind Section 194LBA is the pass-through status of business trusts. This means that certain income types retain their character when passed from the SPV to the trust, and then to the unitholder, ensuring that the income is taxed only once, typically at the unitholder's end.
Who is the Deductor and Deductee?
- Deductor: The Business Trust (REIT or InvIT) itself is responsible for deducting TDS.
- Deductee: The unitholder to whom the income is distributed.
TDS Rates and Thresholds
The TDS rates under Section 194LBA depend on the residential status of the unitholder:
1. For Resident Unitholders
- TDS Rate: 10% on interest income distributed.
- TDS Rate: 10% on income distributed (other than interest or taxable dividend) which is taxable in the hands of the unitholders.
- There is no TDS on taxable dividend income distributed by the business trust to resident unitholders as the dividend distribution tax (DDT) was abolished. However, if such dividend is received from an SPV where the SPV has opted for a lower tax regime (like Section 115BAA/BAB), then TDS provisions may apply.
- There is no threshold limit for deduction of TDS for resident unitholders. TDS is applicable irrespective of the amount.
Example: If a resident individual receives ₹50,000 as interest income from an InvIT, the InvIT will deduct ₹5,000 as TDS (10% of ₹50,000).
2. For Non-Resident Unitholders
- TDS Rate: 5% on interest income distributed.
- TDS Rate: 10% on rental income or other income distributed by a REIT/InvIT to the extent it is taxable in the hands of the non-resident unitholder.
- TDS Rate: For other income distributions (other than interest or dividend from SPV) to non-residents, the TDS rate is 10%.
- The TDS rates for non-residents can also be influenced by Double Taxation Avoidance Agreements (DTAAs) between India and the unitholder's country of residence. If a DTAA provides for a lower rate, that lower rate can be applied, provided the non-resident furnishes a Tax Residency Certificate (TRC) and other necessary documents.
- There is no threshold limit for deduction of TDS for non-resident unitholders. TDS is applicable irrespective of the amount.
Example: If a non-resident individual receives ₹1,00,000 as interest income from a REIT, the REIT will deduct ₹5,000 as TDS (5% of ₹1,00,000), assuming no DTAA benefit applies or the DTAA rate is higher.
Key Aspects of Section 194LBA
- Pass-Through Status: The section aims to preserve the pass-through status for certain income types. This means that the income is taxed at the unitholder's level, not at the trust's level, preventing multiple layers of taxation.
- Income Character: The nature of income (interest, dividend, rental) generally remains the same when passed from the SPV through the business trust to the unitholder. This is crucial for determining the applicable tax rates and TDS provisions.
- Applicable Forms: Business trusts typically use Form 26Q for resident deductor returns and Form 27Q for non-resident deductor returns to report TDS deducted under this section.
- PAN Requirement: If the unitholder does not furnish their Permanent Account Number (PAN), a higher TDS rate (generally 20% as per Section 206AB) may apply. For non-residents, non-furnishing of PAN can lead to the application of the higher of the DTAA rate or 20%.
- Tax Credit: Unitholders can claim credit for the TDS deducted by the business trust when filing their Income Tax Return (ITR). This credit will be adjusted against their final tax liability.
Compliance for Business Trusts and Unitholders
For Business Trusts, compliance involves:
- Accurate classification of income distributed.
- Timely deduction of TDS at the correct rates based on the unitholder's residential status.
- Timely deposit of the deducted TDS to the government.
- Filing of quarterly TDS statements (Form 26Q/27Q).
- Issuing TDS certificates (Form 16A) to unitholders.
For Unitholders, compliance involves:
- Understanding the nature of income received from the business trust.
- Ensuring their PAN is updated with the business trust.
- Considering DTAA benefits if they are non-residents.
- Properly reporting the income and claiming TDS credit in their Income Tax Return.
Significance of Section 194LBA
Section 194LBA plays a crucial role in the tax framework for REITs and InvITs by providing clarity on the taxation of income distributions. It ensures that the government collects tax at an early stage, facilitates proper tracking of income, and maintains the integrity of the pass-through structure for these investment vehicles. This clarity helps in boosting investor confidence in such instruments, contributing to their growth in India's financial market.
Investing in Business Trusts? Get Expert TDS Guidance!
Understanding the TDS implications under Section 194LBA for income from REITs and InvITs can be complex, especially with varying rates for residents and non-residents. At DisyTax, we specialize in providing clear and comprehensive guidance to both business trusts and individual unitholders.
Our services include:
- TDS Compliance for Business Trusts: Assisting trusts with accurate TDS deductions, timely deposits, and filing of required forms (26Q/27Q).
- Unitholder Tax Advisory: Helping unitholders understand the taxability of their income from REITs/InvITs and guiding them on claiming appropriate TDS credits.
- DTAA Benefit Maximization: For non-resident unitholders, advising on how to leverage DTAA benefits to optimize their tax liability.
- ITR Filing Assistance: Ensuring correct reporting of income and TDS details in your Income Tax Return.
Simplify your Business Trust tax compliance. Contact DisyTax today for tailored solutions!
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