Government Aligns REITs and InvITs with Listed Equities for Long-Term Capital Gains Tax

The Indian government has revised the holding period for calculating long-term capital gains (LTCG) for units of listed business trusts—specifically Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This change reduces the required holding period from 36 months to 12 months, bringing it on par with listed equity shares. The initiative is part of the Union Budget 2024 and is designed to create a more dynamic and flexible investment environment.

Key Highlights:

1. Reduction in Holding Period: The holding period for determining long-term capital gains on units of listed business trusts has been significantly reduced from 36 months to 12 months. This aligns REITs and InvITs with the treatment of listed equity shares, simplifying tax calculations and fostering a more investor-friendly climate.

2. Enhancing Liquidity and Flexibility: REITs and InvITs are relatively new investment vehicles in the Indian market. REITs are composed of portfolios of commercial real estate assets, primarily leased out, while InvITs consist of portfolios of infrastructure assets such as highways and power transmission lines. By reducing the holding period, the government aims to make these instruments more attractive to investors, enhancing their liquidity and flexibility.

The Indian REITs Association, which includes the four listed REITs in the country, has welcomed the government's decision. The association noted that the previous extended holding period of 36 months often acted as a barrier to investment flexibility and liquidity, particularly in the real estate sector. This change, they argue, addresses a long-standing industry request and is expected to lead to increased investor participation in REITs and InvITs.

Government’s Commitment to Infrastructure:

Manish Satnaliwala, CEO of National Infrastructure Trust, emphasized that this move demonstrates the government’s focus and commitment towards strengthening the infrastructure sector. He pointed out that such measures are crucial for long-term economic growth and development. By shortening the holding period to just 12 months, the Union Budget fosters a more agile investment environment, which is essential for attracting more investment into infrastructure projects.

Impact on the Market:

The decision to reduce the holding period for long-term capital gains on business trusts is expected to have a significant positive impact on the market. REITs and InvITs are designed to provide investors with a way to invest in real estate and infrastructure assets without the need to directly own and manage the properties. These investment vehicles offer regular income distributions, primarily generated from rental income and tolls, making them attractive for income-seeking investors.

By aligning the holding period for LTCG with that of listed equity shares, the government has made REITs and InvITs more comparable to traditional equity investments. This change is likely to attract a broader range of investors, including retail investors who might have been deterred by the longer holding period previously required to qualify for favorable tax treatment.

Challenges Addressed:

One of the primary challenges addressed by this policy change is the liquidity issue faced by investors in REITs and InvITs. The extended 36-month holding period acted as a deterrent for many investors, limiting their ability to quickly adjust their portfolios in response to market conditions. With the reduction to 12 months, investors will have greater flexibility to buy and sell units of REITs and InvITs without facing significant tax penalties. This is expected to boost trading volumes and market depth, contributing to a more vibrant and resilient market for these instruments.

Broader Budgetary Measures:

The reduction in the holding period for LTCG is part of a broader set of measures included in the Union Budget 2024. Other notable initiatives include efforts to digitize land records and enhance urban development. The budget also introduces changes in tax regulations to address loopholes related to rental income, preventing property owners from declaring house rental income as business income. Additionally, the removal of indexation benefits for certain real estate transactions may lead to a higher tax burden on real estate sales, prompting a re-evaluation of investment strategies in the sector.

Conclusion:

The Union Budget 2024's decision to reduce the holding period for long-term capital gains on REITs and InvITs marks a significant step towards creating a more agile and investor-friendly environment in India’s real estate and infrastructure markets. By aligning these instruments with listed equity shares, the government has addressed key industry concerns and provided a much-needed boost to liquidity and investment flexibility. As the market responds to these changes, it is expected that REITs and InvITs will become more attractive to a wider range of investors, thereby supporting the long-term growth and development of India’s infrastructure and real estate sectors.

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