By CA Surekha S Ahuja
The 2026 amendment is not merely a tax relief for REIT and InvIT investors. It is a structural correction: the tax regime chosen by an SPV is now separated from the dividend exemption of the unit holder.
The Taxation and Other Laws (Amendment) Act, 2026 has corrected an unintended conflict between the new MAT framework, the concessional corporate-tax regime and the pass-through taxation of REITs and InvITs.
The change is effective from 1 April 2026. The result is simple but significant:
SPV chooses its tax regime → SPV bears its own tax consequences → unit holder's dividend exemption is no longer lost merely because the SPV opted for Section 200.
However, Parliament has simultaneously increased the surcharge for qualifying business-trust SPVs opting for the concessional regime from 10% to 25%.
The problem Parliament has actually fixed
The Income-tax Act, 2025 carries forward the business-trust pass-through architecture through Section 223 read with Schedule V.
Schedule V, Table Serial No. 3 exempts specified interest and dividend received by a business trust from its SPV. Table Serial No. 5 deals with the corresponding distributed income in the hands of the unit holder. But the original wording of Serial No. 5 contained an important restriction:
Dividend from an SPV that had exercised Section 200 → corresponding dividend component was not exempt in the unit holder's hands.
So the investor's tax position could depend upon a decision taken by the underlying SPV.
The anomaly
SPV opts for concessional regime
↓
SPV gets its own corporate-tax benefit / MAT-credit opportunity
↓
REIT/InvIT receives dividend
↓
Unit holder loses dividend exemption
The investor had not made the tax election. Yet the investor bore its consequence. That was the structural mismatch.
Why did this become a 2026 problem?
Because the MAT reforms of Finance Act, 2026 made migration to the concessional regime more relevant for companies having accumulated MAT credit or facing the changed consequences of remaining under the old regime.
For an SPV, therefore, the commercial question could legitimately become: Should we move to the concessional regime?
But under the earlier business-trust framework, the answer could indirectly become: If we move, our REIT/InvIT investors may lose their dividend exemption.
This was precisely the wrong interaction between two policy objectives.
MAT policy
Encourage rational migration to the concessional regime versus
Business-trust policy
Preserve the intended pass-through treatment for investors
TOLA 2026 resolves the conflict by removing the condition linking the unit-holder exemption to the SPV's Section 200 election. The amendment specifically omits the relevant clause in Schedule V, Table Serial No. 5.
What changed — in one table
| Particular | Earlier position | From 1 April 2026 |
|---|---|---|
| Dividend received by business trust from SPV | Exempt under Schedule V | Continues to be exempt |
| SPV under regular regime | Unit-holder dividend exemption | Exempt |
| SPV under Section 200 | Unit-holder exemption could be denied | Exempt |
| Unit-holder exemption dependent on SPV's regime | Yes | No |
| Concessional-regime surcharge for specified SPV | 10% | 25% |
The amendment therefore does not make all REIT/InvIT distributions tax-free. It specifically removes the adverse consequence attached to the dividend component arising from the qualifying SPV.
Interest, rental income, capital gains and other components continue to require separate analysis.
The most important policy insight: decoupling
The amendment should be understood as a decoupling exercise.
Earlier
SPV's tax election
→ investor's dividend exemption
Now
SPV's tax election
→ SPV-level tax consequences
while separately:
Qualifying dividend
→ business trust
→ unit holder exemption
This is more than a tax concession.
It restores a basic principle of pass-through taxation: A tax decision made at the SPV level should not, merely because of that decision, alter the tax character of an otherwise exempt distribution in the hands of the ultimate investor.
But the relief is not free: 25% surcharge
Parliament has created a fiscal counterweight.
For specified SPVs of business trusts opting for Section 200 or Section 201, the surcharge has been increased from 10% to 25%. Ordinary domestic companies opting for those concessional regimes continue to fall under the 10% category.
This is important because 25% is the surcharge on income-tax, not a 25% corporate tax rate.
For a company otherwise taxed at 22%:
| Earlier | Now | |
| Base tax | 22% | 22% |
| Surcharge | 10% of tax | 25% of tax |
| Tax + surcharge | 24.20% | 27.50% |
| Including 4% cess | 25.17% | 28.60% |
Thus the Government has effectively shifted the fiscal cost:
Earlier potential cost → unit holder
Now additional cost → qualifying SPV
while restoring the investor exemption.
That is the key economic trade-off.
The real impact on SPV decision-making
This is where the amendment becomes commercially important.
An SPV should now evaluate its tax regime primarily on its own economics:
- accumulated MAT credit;
- future MAT exposure;
- concessional tax rate;
- 25% surcharge;
- project life;
- expected taxable profits;
- cash flows;
- debt servicing;
- expected distributions.
It no longer needs to treat loss of the investor's dividend exemption as an automatic consequence of choosing Section 200.
Therefore: The amendment improves tax neutrality inside the REIT/InvIT structure, even though it makes the concessional regime more expensive for the qualifying SPV.
The ₹100 dividend test
Suppose an SPV ultimately distributes ₹100 of post-tax profit as dividend to the REIT/InvIT.
Earlier - SPV on regular regime
₹100 → REIT/InvIT → Unit holder
Dividend exemption available
SPV on Section 200
₹100 → REIT/InvIT → Unit holder
Dividend exemption could be denied
From 1 April 2026
SPV on either regime
₹100 → REIT/InvIT → Unit holder
Dividend exemption is no longer denied merely because Section 200 was chosen.
The SPV still pays tax under its applicable regime, including the enhanced surcharge where applicable.
The amendment therefore does not eliminate tax at the SPV level.
It removes the second-level tax consequence for the investor.
The one important loose end: TDS
This is the issue that deserves professional attention. The substantive exemption has been widened.
But Section 393(4), which specifies circumstances where TDS is not to be deducted, still contains the earlier condition for business-trust income: no TDS where the relevant dividend income is from an SPV that has not exercised the option under Section 200.
The current Income-tax Department text of Section 393 expressly contains this condition.
That creates a potential mismatch: Substantive law → dividend exemption restored irrespective of SPV regime but
TDS law → no-deduction condition still refers to an SPV not having exercised Section 200.
This should not be casually dismissed.
Professional implication
Tax exemption ≠ automatic TDS exemption.
Until the provision is amended or CBDT clarifies the position, REITs/InvITs should separately review their withholding position before changing their TDS systems or distribution processes.
This is arguably the most important unresolved technical point in the amendment.
Before and after: the complete professional picture
| Issue | Before 1 April 2026 | From 1 April 2026 |
| SPV's choice of concessional regime | Could affect investor exemption | Does not by itself affect exemption |
| Dividend at business-trust level | Exempt | Exempt |
| Dividend at unit-holder level | Conditional | Condition removed |
| SPV surcharge under concessional regime | 10% | 25% |
| MAT-credit-driven regime decision | Could create investor-level collateral consequence | Investor consequence removed |
| TDS relaxation | Aligned with old condition | Potential statutory mismatch |
| Overall architecture | SPV choice could disturb pass-through | Pass-through restored |
What REITs, InvITs and SPVs should do now
SPVs - Recompute the tax-regime decision.
Do not compare only headline tax rates. Model: MAT credit + future MAT + concessional tax + 25% surcharge + cash-flow impact.
REITs / InvITs - Revisit distribution modelling.
Map each SPV's tax regime and separately identify:
dividend | interest | rental income | other income | capital gains | redemption-related amounts.
Tax teams - Review Section 393 TDS separately.
Do not assume that the amended substantive exemption automatically changes the withholding obligation.
The professional conclusion
The 2026 amendment should be read as a policy correction, not merely a tax concession.
The Government had created an incentive for companies to reconsider the concessional tax regime through the MAT reforms. That incentive could, however, have unintentionally penalised REIT/InvIT investors because the SPV's election could destroy their dividend exemption.
Parliament has now removed that link.
The new architecture is:
MAT reform
↓
SPV may rationally migrate to concessional regime
↓
Investor's dividend exemption remains protected
↓
Qualifying SPV bears 25% surcharge
↓
TDS alignment remains the unfinished issue
The most important takeaway
The SPV's tax regime now determines the SPV's tax cost—not, merely by itself, the investor's dividend exemption.
That is the real significance of the 2026 REIT/InvIT amendment. And for professionals, the next question is not whether the dividend is exempt.
It is: Has the withholding mechanism under Section 393 moved with the substantive exemption?
As the law presently reads, that question still deserves a careful answer.
