Infrastructure Investment Trust (InvIT)
1. Meaning of InvIT
Infrastructure Investment Trusts (InvITs) are investment vehicles designed to allow
investors to participate in infrastructure projects such as roads, power
transmission, pipelines, telecom towers, etc., which were earlier accessible mainly
to large institutional investors.
InvITs pool money from investors and deploy it into income-generating
infrastructure assets, offering regular cash flows and long-term returns.
2. Role of SPV (Special Purpose Vehicle)
What is an SPV?
A Special Purpose Vehicle (SPV) is a separate legal entity created specifically to
hold and operate infrastructure assets.
Why SPVs are used in InvITs?
InvITs generally do not invest directly in infrastructure projects.
Funds collected from investors are transferred to SPVs.
The actual infrastructure assets and operations are housed at the SPV level.
This structure is widely followed by both REITs and InvITs for operational,
regulatory, and risk-management reasons.
Key Point:
The income generated by infrastructure assets flows from the SPV to the InvIT
and then to unit holders.
3. Pass-Through Status under Income Tax Act
Meaning of Pass-Through Entity
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A pass-through entity is one whose primary tax function is to pass income to
investors without being taxed at the entity level.
InvIT as a Pass-Through Entity
Since InvITs invest only through SPVs, they are treated as pass-through
entities.
The Income Tax Act grants pass-through status to InvITs when investments
are made through SPVs.
Income eligible for pass-through
When conditions are satisfied:
Interest income from SPVs – Not taxable at InvIT level
Dividend income from SPVs – Not taxable at InvIT level
Rental / leasing income (in case of REITs) – Not taxable at InvIT level
Result:
Taxation primarily shifts to the unit holder level, depending on the nature of
income.
4. Types of Cash Flows Distributed by InvITs
InvITs distribute income to unit holders from multiple sources:
1. Rental / Leasing Income
Income from assets held directly (mainly relevant for REITs)
2. Dividend Income from SPVs
Dividend declared by SPVs out of post-tax profits
3. Interest Income from SPVs
Interest on loans provided by InvIT to SPVs
4. Repayment of Principal by SPVs
Return of loan principal by SPVs to InvIT
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5. Taxation of InvIT Distributions – Before and After
2023
A. Position Before 2023
Interest income: Taxable in the hands of unit holders
Dividend income: Taxable as per applicable provisions
Repayment of principal:
Not taxed at any level (neither InvIT nor unit holder)
Considered capital recovery
B. Position After 2023 Amendments
Section 56(2)(xii) – Key Change
Any specified sum received by a unit holder from a business trust is taxable under
Income from Other Sources (IFOS) if:
It is not interest, dividend, or rental income as referred in Section
10(23FC)/(23FCA), and
It is not taxable in the hands of the business trust under Section 115UA
Impact:
Repayment of principal by SPVs, which was earlier tax-free, is now taxable in
the hands of unit holders.
6. Comparative Regime Analysis (Before vs After)
Aspect Pre-2023 Post-2023 / 2025
Debt repayment Taxable as IFOS (with cost
Tax-free
distributions adjustment)
Trust-level taxation Largely exempt Largely unchanged
No Section 112A Section 112A benefit from AY 2026–
LTCG on listed units
benefit 27
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Aspect Pre-2023 Post-2023 / 2025
Investor certainty Moderate Significantly improved
Arbitrage potential High Substantially reduced
7. Practical Case Study – Real-Life InvIT Distribution
(As per Statement)
Facts (Distribution dated 21-Nov-2025)
An InvIT unit holder received the following distribution for the year based on the
actual statement issued by the investment company:
Component Amount (₹) Tax Treatment Relevant Section
Interest from SPV 1,10,383.61 Taxable under IFOS Section 56, 10(23FC)
Dividend from SPV 32,299.54 Exempt Section 10(23FC)
Capital repayment 2,65,839.10 Not immediately taxable Section 56(2)(xii)
Other income 22,933.74 Taxable under IFOS Section 56(2)(xii)
TDS deducted on interest @10% under Section 194LBA: ₹11,039
Tax Computation Summary
Taxable Income (Income from Other Sources):
Interest income: ₹1,10,383.61
Other income: ₹22,933.74
Dividend from SPV: ₹32,299.54
Total taxable IFOS income: ₹165616.89
Important Concept: Capital Repayment and Cost Reduction
Capital repayment received from an InvIT represents repayment of loan principal
by the SPV. As per Section 56(2)(xii):
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Such repayment is not taxed immediately in the year of receipt.
The amount received is reduced from the cost of acquisition of InvIT units.
Tax arises only when the cumulative capital repayment exceeds the original
cost of acquisition, or at the time of sale of units through higher capital gains.
This ensures deferred taxation, not exemption.
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