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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Other Products

A unitholder receives a distribution from a listed REIT that is classified as repayment of debt or return of capital rather than income. How is this component treated for the unitholder?

The repayment or return-of-capital component of a REIT distribution is not taxed on receipt, but it reduces the unitholder's cost of acquisition. This leads to a higher capital gain, or lower loss, when the units are eventually sold.

  1. AIt is not taxed as income when received, but reduces the cost of acquisition of the units for computing later capital gainsCorrect
  2. BIt is taxed at slab rates in the year of receipt as interest income
  3. CIt is fully taxed immediately as long-term capital gain at 12.5%
  4. DIt is exempt and has no effect on the cost of acquisition of the units

Explanation

The amortisation of SPV debt passed through as repayment is not taxed as income on receipt. Instead, the amount is reduced from the unitholder's cost of acquisition, so a higher capital gain arises when the units are sold. Treating it as exempt with no cost adjustment would understate the eventual gain.

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