Consider the following statements: Statement-I: Interest income from

Consider the following statements:

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Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II: InvITs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’.

Which one of the following is correct in respect of the above statements?

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1

Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-1

Statement-I is correct but Statement-II is incorrect

Statement-I is incorrect Statement-II is correct

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2023

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Statement-I claims that interest income from InvIT deposits distributed to investors is exempted from tax, but dividend is taxable. This is incorrect as per current tax laws in India applicable to InvITs/REITs. Distributions from InvITs are taxed in the hands of the unit holders based on the nature of income received by the SPV/Trust. Interest income distributed by the InvIT is generally taxable for the unit holder. Dividend income distributed by the InvIT out of taxable income of the SPV is also taxable for the unit holder. Dividend distributed out of exempt income of the SPV is exempt. Therefore, the statement that interest income is exempt is incorrect.

Statement-II states that InvITs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’ (SARFAESI Act, 2002). InvITs and their underlying Special Purpose Vehicles (SPVs) often borrow funds to finance their infrastructure projects. When they borrow from banks or financial institutions against their assets, they become borrowers. If they default, the lenders can enforce security interests under the SARFAESI Act, which applies to loans secured by immovable assets. Thus, InvITs (or their SPVs through which assets are held) are considered borrowers under the purview of the SARFAESI Act. This statement is correct.

– Statement-I is incorrect regarding the tax exemption of interest income distributed by InvITs; interest is typically taxable.
– Statement-II is correct as InvITs/SPVs borrowing funds can fall under the purview of the SARFAESI Act as borrowers.
– Since Statement-I is incorrect and Statement-II is correct, option D is the correct choice.

The tax treatment of InvIT distributions has evolved. As of recent provisions (post-Budget 2020), distributions are taxed at the investor level based on their underlying character (interest, dividend, or capital repayment). Interest distributions are taxable at applicable rates. Dividend distributions are taxable if they come from the SPV’s taxable income, otherwise, they are exempt. Capital repayments are generally exempt. The SARFAESI Act empowers banks and financial institutions to recover non-performing loans without court intervention by dealing with secured assets, and entities borrowing against such assets, including those held by InvITs or their SPVs, fall under its definition of a borrower.

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