Business Trust Capital Gains (Section 115UA)

Section numbers here are from the Income tax Act, 1961. The Income tax Act, 2025 renumbers these provisions from Tax Year 2026-27 onward. This article is for general information and does not constitute tax advice.

Which year are you in? It decides your rate

Section 115UA(2) charges a business trust’s total income at the maximum marginal rate, subject to Sections 111A and 112. For years, the reference to Section 112A was simply absent from that list, and that omission is why REIT and InvIT unit holders did not get the ₹1.25 lakh long-term exemption that listed equity investors did. The Finance Act 2025 corrected it, with effect from 1 April 2026.

Sale in	Long-term gain on listed units	₹1.25 lakh exemption
FY 2025-26 (the return being filed now)	Section 112, 12.5% without indexation	Not available
FY 2026-27 onward	Section 112A, 12.5%	Available

The consequence for the current filing season is blunt: a ₹50,000 long-term gain on REIT units sold during FY 2025-26 is taxed in full at 12.5%, with no exemption applied, even though the identical gain on listed shares would have been entirely covered. Short-term gains are 20% under Section 111A either way, and the short-term or long-term line sits at 12 months for listed units, not 24. Published commentary gets that wrong often enough to be worth stating plainly.

Your distribution has up to four components, taxed four different ways

This is where most REIT investors go wrong. A quarterly distribution is not one number with one tax treatment. Under the pass-through structure, income keeps its character as it flows from the SPV through the trust to you, and the statement you receive breaks it into components for exactly that reason.

Component	In your hands
Interest	Taxable at your slab rate
Dividend	Exempt, including where the SPV has opted for the concessional corporate regime, following the August 2026 amendment below
Rental income (REIT, directly held property)	Passed through and taxable
Return of capital	Not taxed on receipt; reduces your cost of acquisition instead

TDS is deducted at 10% under Section 194LBA on the interest and dividend components for resident unit holders, with no minimum threshold. The trust issues an annual consolidated statement in Form 64B, which is what you reconcile your return against. Business trust distributions cannot be reported in ITR-1; ITR-2 is the relevant form.

The August 2026 amendment: dividend exemption restored, SPV surcharge raised

The Taxation and Other Laws (Amendment) Act, 2026 (Act No. 21 of 2026) received Presidential assent on 17 August 2026 and is deemed to have come into force on 1 April 2026. It is law, and it is backdated to the start of the current tax year. It also repeals the Income-tax (Amendment) Ordinance, 2026, under which the same changes had been operating in the interim.

For unit holders the effect is straightforward relief. The condition that previously withdrew the dividend exemption where the underlying SPV had opted into the concessional corporate regime has been omitted from Schedule V. A REIT or InvIT unit holder no longer loses the exemption because the SPV migrated regimes.

The cost sits with the SPV, and it is larger than most commentary suggested. The Act amends the Finance Act 2026 surcharge tables to split domestic companies taxed under Section 200 or 201 into two categories. An ordinary such company continues at a flat 10% surcharge. One that is a special purpose vehicle of a business trust pays 25%. This was widely described in advance as an “additional 15% surcharge”; the mechanism is in fact the surcharge rate itself moving from 10% to 25% for these SPVs.

Why this became urgent is worth understanding. The Finance Act 2026 reformed minimum alternate tax so that MAT is a final tax for a company remaining on the regular regime, with accumulated credit usable only on shifting to the concessional regime, as set out in MAT vs AMT: Which Applies to You. That pushed SPVs hard toward migrating, and under the law as it then stood a migrating SPV would have stripped its own unit holders of the dividend exemption as a side effect. The amendment severs that link and charges the SPV for the privilege instead.

For anyone modelling an SPV’s regime choice, the arithmetic has therefore moved twice in a single year, and the 25% surcharge needs to be in the comparison rather than the 10% figure that applies to companies generally.

Return of capital: what the 2023 change actually did

Distributions representing an SPV’s repayment of debt owed to the trust used to escape tax at both levels, and Budget 2023 set out to close that. The original proposal was to tax the whole amount as Income from Other Sources on receipt. That proposal was softened before enactment, and the position that became law is materially better for investors: the distribution is treated as a return of capital, reducing your cost of acquisition up to the price at which the unit was issued, with only the amount exceeding the issue price taxable as income.

This creates an obligation people forget years later. When you eventually sell, your cost of acquisition is the original price less every return-of-capital distribution received while you held the units. Using the original purchase price overstates your cost and understates your gain. Over a long holding period in a REIT distributing meaningful amounts of capital, the difference is not small, and the department has the trust’s own reporting to compare against.

The sponsor’s side: exchanging SPV shares for units

When a REIT or InvIT is set up, the sponsor typically transfers SPV shares to the trust in exchange for units. Section 47(xvii), which becomes Section 70(1)(zi) under the Income tax Act, 2025, keeps that exchange outside capital gains taxation entirely, so restructuring itself triggers no immediate bill.

Two continuity rules make the deferral genuinely useful. The cost of acquisition of the units is deemed to be the cost of the shares given up, and the holding period of the units includes the period the original shares were held. A sponsor who held the underlying shares for years carries that history into the units. The gain does not disappear; it crystallises when the sponsor eventually sells.

Where the trust itself is taxed

The structure is a pass-through for interest, dividend and rental income, which is taxed in unit holders’ hands rather than at trust level. Where the trust does bear tax on its own income, Section 115UA(2) applies the maximum marginal rate, subject to the concessional capital gains sections discussed above. Capital gains arising on the trust’s own disposal of an underlying asset generally follow the same pass-through logic to unit holders rather than being charged separately at trust level.