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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
Guest previewThis 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.
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