Question map
Consider the following statements : Statement-I : Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable. Statement-II : InvITs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'. Which one of the following is correct in respect of the above statements?
Explanation
The correct answer is Option 4 because Statement-I is incorrect while Statement-II is correct.
Statement-I is incorrect: Under the Income Tax Act, interest income received by unit holders from an InvIT is generally taxable at the applicable slab rates of the investor. Conversely, dividends distributed by InvITs are exempt from tax in the hands of the unit holder only if the Special Purpose Vehicle (SPV) has not opted for the concessional tax regime under Section 115BAA. Therefore, the claim that interest is exempt while dividends are taxable is factually reversed and inaccurate.
Statement-II is correct: To facilitate ease of recovery and strengthen the debt market, the Government amended the SARFAESI Act, 2002, to include InvITs (and REITs) under the definition of "borrowers." This legal recognition allows pooled investment vehicles to be treated as corporate bodies for debt recovery purposes, enabling lenders to enforce security interests effectively if the trust defaults on its obligations.
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Finance Current Affairs' bouncer. It targets the intersection of the Union Budget (Taxation rules) and Banking Laws (SARFAESI). The strategy is not to memorize the entire Income Tax Act, but to track 'New Asset Classes' (InvITs/REITs) championed by the government for the National Monetisation Pipeline. If an instrument is in the news for regulatory easing, check its Tax status and Legal status.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Is interest income from deposits held by Infrastructure Investment Trusts (InvITs) and distributed to their investors exempt from income tax in India as of 2023?
- Statement 2: Are dividends distributed by Infrastructure Investment Trusts (InvITs) taxable in India as of 2023?
- Statement 3: Are Infrastructure Investment Trusts (InvITs) recognized as "borrowers" under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) in India?
Establishes legal form: InvITs are trusts registered under the Indian Trusts Act and regulated by SEBI, i.e., they are a distinct entity type whose form can affect tax treatment.
A student could check typical tax rules applied to trusts vs companies in Indian tax law to see whether distributions from a trust are taxed in the hands of investors or at the trust level.
States that regular revenue (rentals/tolls or sale proceeds) comes to InvITs and 'will then be returned as dividend to investors', linking InvIT distributions to dividends.
Given this, a student could compare how 'dividend-like' distributions from InvITs are classified under income-tax law (e.g., dividend vs interest vs business income) to infer likely taxability.
Explains that rent accrued is distributed to unit holders of REITs (analogous to InvITs), reinforcing that operational receipts are passed to investors as distributions.
One could use the parallel with REITs to examine specific statutory provisions or notifications that treat distributions from such pooled-asset trusts for tax purposes.
Explains dividend taxation change: DDT was abolished in 2019 and dividends are taxable in the hands of shareholders, indicating a general rule that distributions categorized as dividends are taxable to recipients.
A student can use this to test whether InvIT distributions are legally treated as 'dividends' (and thus taxable) rather than as exempt receipts.
Lists income categories under Income Tax Act, noting interest as 'income from other sources' which is generally taxable.
If the distributed receipts are characterized as interest (rather than dividend), this suggests they would fall under taxable categories, so a student could investigate how distributions from deposits held by InvITs are classified.
States that InvITs receive regular revenue from projects which 'will then be returned as dividend to investors', establishing that InvITs make dividend-like distributions.
A student could treat InvIT distributions analogously to corporate dividends and check whether general dividend tax rules apply to such distributed income.
Explains the general rule that Dividend Distribution Tax (DDT) was abolished in Budget 2019–20 and dividends were made taxable in the hands of shareholders.
A student could apply this post-2019 rule to InvIT investor receipts (if InvIT distributions are treated like shareholder dividends) and verify if any special carve-outs exist for trusts.
Defines InvITs/REITs as trusts registered under the Indian Trusts Act and regulated by SEBI, i.e., a different legal form than a company.
A student could use the legal-form difference to suspect that tax rules for companies (and their dividend treatments) might not automatically apply to trusts and therefore should check trust-specific provisions.
Shows REITs (parallel vehicle) function like mutual funds/trusts and distribute rent to unit holders, indicating securities-like distributions to investors.
A student could analogize InvITs with REITs (both distribute income to unit-holders) and then look up whether REIT distributions are taxed at the investor level to infer likely treatment for InvITs.
Notes that InvITs can issue financial instruments (e.g., bonds), indicating they operate in capital markets and are listed/traded (implied elsewhere), suggesting investor receipts are akin to investment income.
A student could combine this with the post-2019 rule (DDT abolished) and the listed/investment nature to check whether distributions to investors are treated as taxable income (like other investment returns) in their hands.
- Directly states the Bill seeks to amend the SARFAESI Act to include a 'pooled investment vehicle' within the definition of 'borrower'.
- A 'pooled investment vehicle' is the category that covers entities like InvITs, so this indicates recognition under SARFAESI.
- States the government intended to introduce amendments to SARFAESI to enable InvITs and REITs to avail debt financing.
- Confirms legislative action linking InvITs/REITs specifically to changes in SARFAESI treatment for borrowing and enforcement.
- Notes that SARFAESI remedies are available to lenders to Trusts, implying enforcement mechanisms can apply where trusts are treated as subjects of lending/recovery.
- Supports the idea that trusts (the form InvITs take) interact with SARFAESI enforcement regimes.
Defines InvITs as trusts registered under the Indian Trusts Act and regulated by SEBI (i.e., legal form and regulator of InvITs).
A student could check SARFAESI's legal definition of 'borrower' to see if trusts or SEBI‑regulated entities are included or excluded.
States that InvITs can issue bonds (e.g., masala bonds), implying they can act as debt‑raising entities/borrowers.
Combine with SARFAESI's scope (applies to loans/secured creditors) to investigate whether debt instruments issued by InvITs create borrower-creditor relationships covered by SARFAESI.
Explains SARFAESI is the statute enabling banks/financial organisations to recover bad loans — identifies the Act's purpose and beneficiary parties (banks/FIs).
A student could compare which kinds of 'debtors/borrowers' are subject to SARFAESI (banks' borrowers) and then test whether InvITs commonly borrow from banks/FIs under secured facilities.
Describes SARFAESI powers (enforce security without court, notice to defaulting loan takers), highlighting that the Act operates on secured loan relationships.
Use this to check if InvITs take secured loans (i.e., grant security interests) — if they do, those facilities might fall under SARFAESI depending on statutory definitions.
Describes InvITs' asset base and revenue generation (projects, rentals, listed status), suggesting the presence of assets that could be charged as security for loans.
A student could investigate whether mortgage/charge over InvIT assets is a recognized security under SARFAESI and whether InvITs' asset structure permits enforcement under the Act.
- [THE VERDICT]: Bouncer/Trap. Source: Specific amendments in the Finance Act (Budget) and SARFAESI Act updates (2021). Standard books cover the definition, not the granular tax/legal fine print.
- [THE CONCEPTUAL TRIGGER]: The government's push for the 'National Monetisation Pipeline' (NMP). InvITs are the primary vehicle for this, making their regulatory plumbing (Tax + SARFAESI) high-yield.
- [THE HORIZONTAL EXPANSION]: 1. Minimum subscription for InvITs (lowered to ₹10k-15k range). 2. 'Pass-through' status concept (Tax levied on investor, not the trust). 3. Difference between Public vs Private InvITs. 4. Sponsor lock-in requirements (usually 3 years for 15%). 5. REITs vs InvITs asset composition (80% in completed/revenue-generating assets).
- [THE STRATEGIC METACOGNITION]: When a financial instrument is 'hot' (like InvITs for infrastructure), prepare three layers: Layer 1: Structure (Trust vs Company). Layer 2: Regulator (SEBI). Layer 3: The 'Sweeteners' (Tax exemptions) and 'Teeth' (SARFAESI recovery powers).
InvITs and REITs pool investor funds to invest in infrastructure or real estate and distribute regular revenue (rent, tolls, sale proceeds) to unit holders.
High-yield for questions on infrastructure finance and capital markets: knowing their structure clarifies what kinds of income (rent, tolls, interest on deposits) flow through these vehicles and how they reach investors. Connects to regulation (SEBI), investment products, and public‑private financing models; enables answers on revenue streams, investor returns, and regulatory implications.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 438
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 439
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > REAL ESTATE INVESTMENT TRUST (REIT) > p. 271
Interest is listed as a form of income under the Income Tax Act and is treated as taxable income unless a specific exemption applies.
Core for any question on taxability of receipts: distinguishing income types (salary, business profits, capital gains, other sources like interest) determines tax treatment and applicability of exemptions. Links taxation topics to public finance and policy assessments and helps evaluate claims about exemptions.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > DIRECT TAX > p. 86
Dividend Distribution Tax was abolished in 2019 and dividends became taxable in the hands of recipients.
Important for analyzing who bears tax on distributed returns and the impact of fiscal reforms on investor receipts; connects corporate taxation changes to personal tax incidence and financial sector questions. Enables evaluation of whether distributed amounts are taxed at trust level or with investors.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Following are certain basic features of the above taxes: - > p. 170
InvITs and REITs are trusts registered under the Indian Trusts Act and regulated by SEBI, and they pool investor funds to invest in infrastructure/real estate.
High-yield for UPSC: understanding the institutional form clarifies governance, investor rights, and regulatory oversight; connects to questions on financial sector regulation, capital markets, and infrastructure financing. Enables answers on how these vehicles mobilise retail and institutional capital and their role in policy implementation.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 438
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 439
Dividend Distribution Tax was abolished in Budget 2019–20 and dividend income became taxable in the hands of recipients.
Essential for public finance/taxation topics: explains who bears tax on dividend income and links to fiscal policy and revenue implications. Helps answer questions on tax incidence, budget reforms, and comparative tax treatment across instruments.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Following are certain basic features of the above taxes: - > p. 170
InvITs convert infrastructure revenue streams into distributable returns to unit holders and are a modality used in national monetisation efforts.
Useful for infrastructure and economic policy questions: shows how asset monetisation, PPPs and capital markets interact to finance public assets. Helps frame answers on NMP/NIP financing strategies and investment vehicles that channel long-term patient capital.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > To finance The National Infrastructure Pipeline, Government has set up National Monetization Pipeline (NMP). > p. 441
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 439
InvITs are trusts registered under the Indian Trusts Act and are regulated entities that pool investor funds for infrastructure projects.
High-yield for banking and financial sector questions: understanding the legal form of InvITs helps determine which laws and regulators apply. Connects to topics on securities regulation, corporate forms, and public-private financing models. Enables answers on regulatory jurisdiction and applicability of financial laws.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 438
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 14: Infrastructure and Investment Models > InvITs and REITS > p. 439
The 'Repayment of Debt' Loophole: The real news in 2023 was that InvITs were distributing money as 'repayment of debt' to avoid tax. Budget 2023 plugged this by making such distributions taxable. This specific controversy likely triggered the question on taxability.
The 'Interest is Income' Heuristic: Statement I claims 'Interest income... is exempted'. In the Indian tax regime, Interest is almost *always* taxable (unless it's PPF or specific Tax-Free Bonds). For a market-linked instrument like an InvIT, interest being tax-free is highly improbable. This makes Statement I suspicious immediately. (Option D becomes the likely answer).
Mains GS-3 (Infrastructure Investment): Why give InvITs 'borrower' status under SARFAESI? It reduces risk for banks lending to infrastructure projects. If an InvIT defaults, banks can seize assets without court intervention. This lowers the 'Cost of Capital' for Indian Infrastructure.