Section 223 of the Income-tax Act, 2025 — Tax on Income of Unit Holder and Business Trust (REITs & InvITs)

In plain language

What Section 223 is about

Section 223 of the Income-tax Act, 2025 lays down the special tax code for business trusts — that is, SEBI-registered REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) — and for the unit holders who invest in them. It is the direct successor to Section 115UA of the old Income-tax Act, 1961, and it carries the same core idea into the new law effective from 1 April 2026.

The whole point of the section is a "pass-through" mechanism. A business trust is largely a conduit: it collects income from the properties or infrastructure assets it holds (usually through Special Purpose Vehicles, or SPVs) and passes that income on to unit holders. Section 223 makes sure the income is taxed once, in the right hands, and keeps its original character on the way through.

The five building blocks of Section 223

• Sub-section (1) — Same nature, same proportion: Income distributed by the trust is deemed to be of the same nature and in the same proportion in the unit holder's hands as it was when received by the trust. So interest stays interest, rental income stays rental income, and a capital-gains element stays capital gains.
• Sub-section (2) — Trust taxed at Maximum Marginal Rate (MMR): Whatever total income remains taxable in the hands of the trust itself is charged at the maximum marginal rate (the highest slab rate plus applicable surcharge and cess), subject to the exemptions (interest, dividend and rental income routed from the SPV, which are pass-through).
• Sub-section (3) — Schedule V distributed income: If the distributed income is of the nature listed in Schedule V (the interest/dividend/rental pass-through categories, corresponding to old Sections 10(23FC) and 10(23FCA)), it is deemed to be the income of the unit holder and taxed in the year of distribution.
• Sub-section (4) — Carve-out for "repayment of debt" sums: The pass-through rule in sub-section (1) does not apply to amounts covered by Section 92(2)(k) (the successor to old Section 56(2)(xii)) — the "specified sum" that is really return of surplus dressed up as loan repayment. Those are taxed separately as "income from other sources".
• Sub-section (5) — Mandatory reporting: The person distributing the income on behalf of the trust must file a statement (a prescribed form, the successor to Form 64A/64B and the Form 76 series) with both the unit holder and the tax authority, giving the nature and amount of income.

Who it applies to

• REITs and InvITs registered with SEBI and their trustees / distributing entities.
• Unit holders — resident and non-resident individuals, HUFs, companies and funds who hold units of these trusts.
• SPVs only indirectly — the exemptions flow from how income is routed through the SPV to the trust and on to investors.

How the different streams of income are taxed

• Interest from SPV (passed through): Exempt in the trust's hands, taxable in the unit holder's hands at their slab rate. TDS applies under Section 393(1) (old 194LBA) — 10% for residents, treaty/25%+ for non-residents.
• Dividend from SPV (passed through): Taxable in the unit holder's hands if the SPV has NOT opted for the concessional company tax regime; exempt if it has and the specified conditions are met.
• Rental income (REITs only): Exempt in the trust's hands, taxable in the unit holder's hands at slab rate.
• "Repayment of debt" / return of capital (Section 92(2)(k)): The portion exceeding the issue price and previously untaxed amounts is taxable as income from other sources; the rest reduces the cost of the unit.
• Capital gains on sale of listed units: Governed separately — short-term at 20% (Section 111A regime) and long-term above the threshold at 12.5% under the Section 112A regime, since the 2025/2026 law now expressly extends 112A parity to listed business-trust units.

How it interacts with other provisions

Section 223 does not work alone. It leans on the exemption entries in Schedule V (old 10(23FC)/(23FCA)/(23FD)), on Section 92(2)(k) for the debt-repayment carve-out, on Section 393 for TDS on the distributed income, and on the capital-gains sections for gains on the units themselves. Together they build a single, closed loop that prevents both double taxation and complete escape from tax.

Practical implications for investors

• You will typically receive a distribution breakup statement classifying the payout into interest, dividend, rental, return of capital, etc. — keep it, because each bucket is taxed differently.
• The "return of capital" component is now largely taxable after the 2023 amendment carried into Section 92(2)(k); the old strategy of receiving tax-free "debt repayment" no longer works cleanly.
• TDS at 10% on the taxable interest/rental portion means you may need to claim credit or a refund when you file your return.