Section 10(23FC) of the Income Tax Act provides a tax exemption for specific types of income earned by a Business Trust, such as an Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT).
What’s Exempt:
The following income is exempt in the hands of the business trust:
- Interest income received from a Special Purpose Vehicle (SPV).
- Dividend income referred to in Section 115-O(7) (i.e., dividends on which Dividend Distribution Tax was paid before its abolition).
> A Special Purpose Vehicle is defined as an Indian company in which the business trust holds a controlling interest and a prescribed percentage of shareholding, as per SEBI regulations.
Example:
Suppose UrbanInfra REIT holds 80% equity in MetroBuild Ltd., an SPV. MetroBuild pays ₹10 crore in interest and ₹5 crore in dividends to UrbanInfra REIT.
- The ₹10 crore interest is exempt under Section 10(23FC)(a).
- The ₹5 crore dividend is exempt under Section 10(23FC)(b), provided it meets the conditions under Section 115-O(7) (though this is now largely historical due to the abolition of DDT).
However, when this income is distributed to unit holders, it is taxed in their hands as per Section 115UA, maintaining the same character (interest or dividend) as it had in the trust’s hands.
