SEBI Depository Receipts Framework REITs InvITs 2026 Tax

What Happened?

In August 2026, SEBI (Securities and Exchange Board of India) announced a proposed framework that will allow investors to obtain Depository Receipts (DRs) against their units in Real Estate Investment Trusts (REITs) and publicly listed Infrastructure Investment Trusts (InvITs). SEBI is accepting public comments and suggestions on this proposal until August 25, 2026. This framework aims to enhance liquidity and ease transferability of REIT and InvIT units while maintaining regulatory oversight and investor protection standards.

Background & Legal Context

What are Depository Receipts?

Depository Receipts are negotiable instruments issued by a Depository against underlying securities held with a custodian. When you hold Depository Receipts instead of the actual units, the depository holds the underlying units, and you own the receipt representing those units. This makes trading easier and faster.

Income Tax Act 2025 — Relevant Sections

• Section 2(47) — 'Income': Under the Income Tax Act 2025, income from REITs and InvITs is treated as income from other sources. The new Depository Receipts framework will not change the taxability of distributions received.
• Section 56 — 'Income from other sources': Distributions from REITs and InvITs are taxed as income under this section. Whether you hold actual units or Depository Receipts, the taxability remains the same.
• Section 47(vii) — 'Capital gains exemptions': For capital gains purposes, transfer of REIT or InvIT units is currently exempt under specific conditions. The new DR framework will need to clarify whether this exemption extends to DRs against REIT/InvIT units.
• Section 112 — 'Tax on capital gains': If capital gains are triggered, long-term capital gains from REITs and InvITs are taxed at 20% with indexation benefit (or 15% without indexation), while short-term gains are taxed at slab rates.
• Sections 193-194 — 'TDS on payments': REITs and InvITs already deduct TDS on distributions. With DRs, the depository or custodian holding the underlying units will remain liable for TDS compliance.

REIT and InvIT Regulatory Framework

REITs and InvITs are regulated investment vehicles that allow retail investors to participate in real estate and infrastructure assets. They distribute at least 90% of their net distributable cash flows to unit holders. Currently, investors hold actual units, which involve cumbersome transfer processes and custody arrangements. This new DR framework will streamline these processes.

What Does This Mean for You?

For Individual Investors

If you currently own REIT or InvIT units and opt for the Depository Receipts route:

• Taxation remains unchanged: You will continue to report distributions as income from other sources in your Income Tax return for the relevant Assessment Year (AY 2026-27, AY 2027-28, etc.). The receipt of dividends/distributions will still be subject to TDS under Section 193.
• Capital gains implications: When you convert your actual units into DRs or sell DRs, the capital gains calculation will be based on the cost of acquisition of the original units. You must maintain proper records of your original unit purchase date and cost.
• Enhanced liquidity: DRs will be easier to trade on stock exchanges compared to actual units, which means you can exit your investment more easily. This liquidity improvement has no adverse tax impact.
• Depository charges: The depository will charge fees for holding and transferring DRs. These custodial charges are generally not tax-deductible for individual investors, but you should verify this with your tax advisor when the framework is finalized.

For Corporate Investors / FIIs

• Section 194LC (TDS on rental income): Corporate investors in REITs should track whether DRs trigger different TDS provisions. Currently, distributions from REITs are subject to Section 193 TDS (30% + surcharge + cess). This should remain the same under the DR framework.
• Foreign Institutional Investors (FIIs): FIIs investing in REIT/InvIT DRs will benefit from the ease of transferability. However, they must comply with Portfolio Investment Scheme (PIS) regulations and continue filing Form 15-G/15-H if applicable.

For NRIs / OCBs

Non-resident Indians and Overseas Corporate Bodies will have clearer investment options through DRs. However, they must:

• Ensure compliance with Liberalized Remittance Scheme (LRS) if investing from abroad
• Continue to file Indian tax returns if earning taxable income in India
• Maintain TDS compliance on distributions received

What Should You Do Now?

Immediate Actions (Before August 25, 2026)

• Monitor SEBI announcements: The proposal is open for public comments until August 25, 2026. If you are a major REIT/InvIT investor or fund manager, consider submitting your feedback to SEBI regarding tax clarity and implementation.
• Review your current holdings: Audit your REIT and InvIT unit holdings and cost of acquisition records. Once DRs become operational, you may decide to convert units into DRs, and you'll need clear documentation.
• Consult your tax advisor: Before the framework is finalized, discuss with a tax professional whether converting to DRs makes sense from a tax planning perspective for your specific situation.

After Framework is Finalized (Post August 25, 2026)

• Understand the tax clarity circular: Once SEBI finalizes the framework, CBDT (Central Board of Direct Taxes) may issue a clarification on how DRs against REITs/InvITs will be treated under the Income Tax Act 2025. Keep an eye out for such circulars.
• Update your tax records: If you convert existing units to DRs, ensure you maintain proper records showing the conversion date, cost basis, and the nature of the instrument change.
• TDS compliance: Continue deducting and depositing TDS on any distributions from DRs as per Section 193 or applicable sections.
• Investment decisions: Evaluate whether moving to DRs improves your exit strategy and liquidity, weighing this against any transactional costs or tax implications.

For Assessment Year 2026-27 and Beyond

If you hold REIT/InvIT DRs and receive distributions, you must report this income in your ITR (Income Tax Return) under 'Income from Other Sources.' Use Schedule OS to report such income, and attach TDS certificates as supporting documents.

Key Takeaways

• DRs against REITs/InvITs will not change the tax treatment of distributions or capital gains; they remain taxable as before under Sections 56 and 112 of the Income Tax Act 2025.
• TDS obligations remain unchanged; REITs and InvITs will continue to deduct TDS at the prescribed rates on distributions to unit holders or DR holders.
• Liquidity improvement is tax-neutral; easier transferability of DRs has no adverse tax consequence and may help with portfolio rebalancing.
• Investors must maintain detailed cost records to accurately calculate capital gains when selling DRs, as the cost basis refers to the original unit purchase price.
• CBDT clarification is likely post-August 25, 2026; monitor official tax circulars to understand any specific tax treatment nuances for DRs before making investment decisions.

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