Sebi categorises REIT as equity: Can you consider it for passive income?

Kolkata: Real Estate Investment Trusts, or REITs are gradually emerging as a popular investment instrument in this country. In August, Knowledge Realty Trust REIT notched up a subscription level of more than 13 times making it the most subscribed REIT IPO. Recently, capital markets regulator Sebi categorised REITs as equity instruments, raising the possibility of a significantly higher number of REITs to be listed in the Indian bourses. There are just five REITs listed in the stock exchanges.

The moot question now, can REITs be considered for an ideal instrument for passive income? In a sense REITs are somewhat like mutual funds since they pool in money from many investors and invest in a particular class of asset. The difference with mutual funds is that REITs don't invest in financial instruments but directly in commercial real estate such as office buildings, shopping centres etc. The advantage with REITs is that retail investors can put in realtively small amounts in it tpo the tune of a few thousand rupees. They do not need big capital investment and management that real estate projects typically need.

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REITs are listed on NSE and BSE. Therefore, an individual just needs a demat account to transact in these instruments, which can be purchased/sold like equity shares. With their gradual proliferation, REITs are becoming more and more acceptable to retail investors.

Analysts point out that REITs are a brilliant and modern alternative to investing in traditional real estate projects which is impossible for a common small investor. They also emphasise a few points explaining why one could easily incorporate them in the portfolio. While it is accessible by the virtue of being listed on the bourses, liquidity is another enabling factor. Can be bought and sold easily in sharp contrast to land, buildings and office/commercial space.

There is a lot of transparency in REITs. The instrument is governed by Sebi regulations which also has strict compliance norms and the regulator is constantly upgrading governance and compliance norms.

According to the norms, REITs have to distribute a minimum of 90% of net distributable cash flows to those who hold units. This has to be done twice a year, which seems ideal as a passive income source. The income from which REITs distribute it is the rental income that is generated by assets managed by the REIT. More and more analysts are now advising REITs as an instrument to diversify one's portfolio. At the current stage of evolution of Indian economy, real estate rentals are supposed to rise both in the office space and shopping/commercial category.

It must be noted that any dividend income from REITs is taxable in the hands of the investor according to his/her income tax slab. If REIT units are sold more than 12 months after they were purchased, LTCG (long-term capital gain tax) is applicable on REIT sale gains at the rate of 12.5% (without indexation). However, if REIT units are sold before the cut-off period of 12 months, STCG (short-term capital gains tax) is slapped at 20%.