Rationalisation in taxation of Business trusts by Finance Bill 2025
The Finance Bill, 2025, proposes several key changes in the Income Tax Act, 1961, to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing1 various provisions. Here are some of the key changes:
Business Trusts: The Finance Bill, 2025, proposes changes to the taxation of Business Trusts, which include Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
Pass-through status: These trusts currently enjoy a pass-through status for certain incomes like interest, dividends, and rental income (in the case of REITs). This means these incomes are taxed in the hands of the unit holders, not the trust itself.
Amendment to Section 115UA: The Bill proposes to amend Section 115UA of the Income Tax Act, 1961, to include Section 112A in the computation of the total income of a business trust.
Tax on Long-Term Capital Gains: Section 112A deals with the tax on long-term capital gains from the transfer of equity shares, units of equity-oriented funds, or units of business trusts.
Effective Date: This amendment will take effect from April 1, 2026, and will apply to the assessment year 2026-27 and subsequent years.
Rationalisation in taxation of Business trusts
Finance (No.2) Act, 2014 introduced a special taxation regime for Real Estate Investment Trust
(REIT) and Infrastructure Investment Trust (InVIT) [commonly referred to as business trusts]. The
special regime was introduced in order to address the challenges of financing and investment in
infrastructure. The business trusts invest in special purpose vehicles (SPV) through equity or debt
instruments.
2. Keeping in mind the business structure, the special taxation regime under section 115UA of the
Act, inter-alia, provides a pass-through status to business trusts in respect of interest income, dividend
income received by the business trust from a special purpose vehicle in case of both REIT and InvIT
and rental income in case of REIT. Such income is taxable in the hands of the unit holders unless
specifically exempted.
3. Sub-section (2) of section 115UA provides that the total income of a business trust shall be
charged to tax at the maximum marginal rate, subject to the provisions of section 111A and section 112.
4. It has been noted that reference of section 112A is not mentioned in sub-section (2) of section
115UA. Section 112A provides tax on long-term capital gains in certain cases of long-term capital asset
being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust.
5. It is proposed to amend sub-section (2) of section 115UA to provide that the total income of a
business trust shall be charged to tax at the maximum marginal rate, subject to the provisions of section
111A, section 112 as well as section 112A.
6. This amendment will take effect from the 1st day of April, 2026 and shall accordingly, apply in
relation to the assessment year 2026-27 and subsequent assessment years.
[Clause 25]