Finance Bill 2023: Pension fund investments to be exempt from taxation under InvITs

The government through amendments, has proposed several major changes in the Finance Bill that include those relating to debt mutual funds, pension funds, capital gains and more. The Finance Bill 2023, cleared by Parliament March 24, exempts pension fund investments from taxation under infrastructure investment trusts (InvITs). The new rule will be applicable to investments made on or after April 1, 2023.

In Budget 2023, the government made a proposal to tax a part of distributions by REITs and InvITs, classified as repayment of debt (or return of capital) in the hands of unitholders. However, REITs and and InvITs later approached the government requesting a review of its proposal for 2023-24 to tax income distribution through the mode of repayment of debt as they feel that as an investment class they are still at a nascent stage and the tax proposal would impact them.

At present, InvITs are subject to taxes in a similar manner to mutual funds. All income earned by the InvITs, such as dividends, rent, and capital gains, is subject to income tax. This tax is usually paid at the rate applicable to the investor, such as 10 percent for individuals and 30 percent for corporations.

InvITs must pay capital gains taxes in addition to income taxes when selling their investments Investments owned for more than one year are taxed as long. term earned income, whereas earnings on the sale of assets kept for far less than one year are taxed as short term investment income.

Long term profits are taxable at a rate of 10 percent, when sold after three years, as per LTCG taxation, whereas short term gains are charged at the investors individual income tax rate. In contrast to earnings and capital gains taxes, InviTs are liable for stamp duty on the transmission of underlying investments

– Special Purpose Vehicles (SPV) not required to withhold on payment of interest on debentures

– Exemption to sovereign wealth funds / pension funds for debt repayment from Business Trust introduced (section (10(23FE))

– Cost of unit holders reduced to the extent of distributions in the form of debt repayment (unless such distributions are taxed as IOS). Investors in Business Trust pay 10 percent long-term capital gains tax on exit and don’t get benefit of full cost at present.

– No tax under IOS until distribution in form of debt repayment are upto amount at which units of Business Trust issued