Real Estate Mutual Funds spared of paying any income tax

The Economic Times news paper today reported that the uncertainty over the tax-treatment of real estate mutual funds is set to end soon. The government will exempt from tax the income generated by mutual funds which float schemes which aim to invest mainly in the stocks of realty firms.

According to a senior revenue department official, real estate MFs and other MFs that invest in shares of realty companies will be spared of paying tax on all income. The dividend income of unit holders who buy these products to reap the gains of a realty boom will also be tax-free.

Securities market regulator Sebi had approved the launch of real estate mutual funds almost two years ago. But the operational guidelines or norms are yet to be unveiled. Now, with greater clarity on valuation norms and the calculation of net asset value (NAV), the regulator may soon prepare the ground for the launch of real estate MFs, an official said.

Real estate MFs are expected to be close-ended, and the units of these funds will be listed on the exchanges. Such funds invest in both listed and unlisted securities of realty firms. They offer an opportunity to investors to take an exposure to a sector which offers reasonably attractive capital gains and steady dividend income.

However, the Reserve Bank of India (RBI) has not been comfortable with more investment flowing into realty given the dangers of an asset price bubble.

While real estate mutual funds will stand to gain due to favourable tax treatment, Real Estate Investment Trusts (REITs) that directly buy and sell property including apartments and shopping malls could be denied such benefits.

REITs are investment vehicles registered under the Indian Trusts Act. They are managed by professional real estate investment management companies and invest in properties. They also own and manage properties. An investor can buy units in an REIT just as he does in a mutual fund and earn a dividend income on the unit or shares of an REIT.

Ahead of this year’s budget, the capital market regulator had told the government to consider granting tax benefits to REITs on the lines of local mutual funds to encourage wider investor participation. But the revenue department, it appears, has turned down the proposal. Read More about REIT at Investing in Real Estate Part 2

The income-tax law now provides for a pass-through status for mf’s and all income earned by the fund is tax free. But any income distributed by the mutual fund attracts a dividend distribution tax, depending on the nature of the fund. The maximum rate of dividend distribution tax is 25%. But unit holders do not have to pay any tax on their dividend income.