Taxes make a significant difference to the return you get from investments. Fixed deposit (FD) interest is taxed as ordinary income, equity investors get preferential rates on qualifying capital gains, while REIT investors face a more complicated calculation because a single distribution can contain interest, dividend, rental income and return of capital.

REIT investors could, however, get some tax relief under the Taxation and Other Laws (Amendment) Bill, 2026. The Bill — passed by Lok Sabha — proposes to exempt the dividend component of distributions from Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) even where the underlying special purpose vehicle (SPV) opts for the concessional corporate tax regime. 

This is important because investors should not assume that the entire REIT payout will become tax-free.

REITs are different from FDs and direct equity because the money distributed to unitholders can have different tax treatments depending on its source.

Under the existing framework, REIT distributions are generally split into components such as interest, dividend, rental income and repayment of capital. The tax treatment follows the nature of each component. Interest and taxable dividend income are generally taxable at the investor's applicable slab rate, while rental-income distributions have their own treatment. The Income Tax Department describes the REIT/InvIT framework as a pass-through mechanism for specified income.

Chandni Anandan, chartered accountant and tax expert at ClearTax, said investors should rely on the distribution statement issued by the REIT rather than treating the entire payout as one category of income.

The proposed amendment addresses one specific area. If enacted, the dividend component from qualifying REITs and InvITs will not be taxable in the hands of unitholders merely because the underlying SPV has chosen the concessional tax regime. It does not mean that interest or other taxable components automatically become exempt. 

This distinction matters for investors comparing REITs with conventional income-generating investments.

FDs are relatively straightforward from a tax perspective. Interest earned is generally taxable under “Income from Other Sources” at the investor's applicable slab rate.

For someone in a higher tax bracket, this can substantially reduce the effective return from an FD. For example, if an FD earns 7 per cent a year, an investor whose marginal tax rate is 30 per cent would retain roughly 4.9 per cent before considering cess and other factors.

Tax deducted at source (TDS) by the bank should not be confused with the final tax liability. The TDS is essentially a tax credit. If the investor's actual tax liability is higher, additional tax may be payable when filing the ITR.

Unlike equities and listed REIT units, there is also no separate long-term capital gains advantage simply because an FD is held for several years. Interest is taxed as income rather than as a capital gain.

Equity taxation is comparatively more favourable when the investment is held for the long term.

Listed equity shares held for up to 12 months are generally treated as short-term capital assets. Where the required STT conditions are met, qualifying short-term capital gains are taxed at 20 per cent.

If listed equity is held for more than 12 months, the gain is generally long-term. Under Section 112A, long-term capital gains above the annual Rs 1.25 lakh threshold are taxed at 12.5 per cent, subject to the applicable conditions. 

The same preferential capital gains framework also covers qualifying listed business trust units, including REIT units. The holding period for listed business trust units is 12 months for determining long-term status. 

Dividends from ordinary listed companies, meanwhile, are taxable in the hands of shareholders at their applicable tax rates. Therefore, investors should distinguish between the tax treatment of dividend income and that of gains made from selling shares.

The table highlights why headline yields alone can be misleading. Two investments offering similar pre-tax income can produce different post-tax returns depending on the investor's tax bracket and the nature of the income.

Anandan said investors should avoid assuming that TDS or a tax-free-looking payout settles their reporting obligations.

REIT investors should preserve the distribution statement showing the component-wise break-up of each payout. Equity investors should reconcile their broker statements and contract notes, while FD investors should check bank interest certificates.

Before filing the ITR, investors should reconcile these records with the Annual Information Statement (AIS) and Form 26AS. Interest, dividend and capital gains should be reported under the relevant schedules rather than clubbed together.

Tax should be compared on the post-tax return, not simply the advertised yield. For FDs, the calculation is relatively simple. For equities, the holding period is crucial. For REITs, investors need to look beyond the total distribution and examine exactly what they are being paid.

The proposed REIT tax change could improve the post-tax attractiveness of some distributions, but until the Bill becomes law, investors should continue to apply the existing rules and assess each component separately.

The Bill requires the remaining legislative process, including Rajya Sabha approval and presidential assent, before it becomes law.