Benefits and Limitations of Investing in REITs

The following are some major advantages of purchasing REITs:

Diversification: By giving you access to real estate through REITs, you can diversify your investment portfolio without having to deal with the challenges of owning and operating commercial property. As part of your overall asset allocation strategy, this diversification enables you to invest in assets other than the traditional asset classifications of equity, debt, and gold.

Small Initial Investment: As was previously noted, one of the main issues with investing in real estate is the high ticket size, particularly when it comes to commercial properties. For comparable portfolio diversification advantages, REITs only need an initial investment of about Rs. 50,000.

Professional Management: A professional management team oversees the properties a REIT owns. As a result, activities run well without your involvement in managing commercial real estate.

Regular Income Generation: Rent collections produce revenue for REITs, which must share 90% of this revenue as dividends and interest to investors. This is how REITs give investors consistent income.

Capital Gains: REITs are listed and traded on stock exchanges, and their price fluctuates according to how well they perform Therefore, a profitable REIT may eventually increase in value and be able to be sold. As a result, the investor gains capital.

Additional restrictions on REITs that you want to be aware of include:

Limited Options: In India, there are now only 3 REITs and 1 international REIT fund of fund. This drastically reduces the options available to investors.

Low Liquidity: Although REITs are listed and traded on stock markets, there are not many market participants at the moment, particularly in terms of regular investors. As a result, it could be difficult to sell REIT interests profitably, especially in an emergency. The investment becomes less liquid as a result.

Taxable Dividend: The investor is fully responsible for paying taxes on any dividends or interest received from REITs in accordance with the relevant slab rate. Therefore, those who pay taxes at the 30% rate will forfeit a sizable amount of their dividend income. The tax laws, which are covered next, are another crucial factor to take into account before making an investment in REITs.

Taxation Rules for REITs

Two different taxation rules—one for dividend income and one for capital gains—apply because investors get various sorts of income from REITs. Additionally, when assets made through an International REITs Fund of Fund are redeemed, the tax status is likewise

different. The following tax laws are applicable:

Taxation of Dividends: As of right now, investors are fully liable for paying taxes on dividends received from REITs. The investor's annual income includes dividend payments from REITs, which are taxed at the investor's slab rate for the relevant Financial Year.

Taxation of Capital Gains: The Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) applicable to equity investments cover capital gains from the sale of REITs units. If the holding period for the units is one year or less from the date of unit allocation, STCG is applicable. The capital gains on the selling of units are subject to a 15% STCG tax rate. Buy 4 BHK flats in Nashik The LTCG taxation regulations apply if the holding period extends beyond a year from the date of unit allocation. The LTCG tax rate is 10% of profits exceeding Rs. 1 lakh with no indexation benefit (across all equity investments for the applicable FY).

Taxation of Capital Gains for International REIT Fund of Funds: Non-equity capital gains taxation regulations are applicable if capital gains are made from the sale of International REITs Fund of Funds units. In this example, if the holding period was three years or less, short-term capital gains would apply (calculated from the date of unit allocation). In this instance, STCG is calculated using the investor's appropriate FY slab rate. Units held for more than three years from the date of unit allocation are subject to LTCG tax, which is 20% of indexed capital gains. Let's move on to the process of investing in REITs.

How to Invest in REITs

The simplest approach to invest in REITs is to buy units on the stock market because they are listed and traded on stock exchanges just like Exchange Traded Funds (ETFs). As a result, in order to invest in REITs in India, you need a Demit Account. Similar to Exchange Traded Funds, the price of REITs' units fluctuates in stock markets based on both unit demand and REIT performance. You currently have three options: Brookfield India Real Estate Trust, Mindspace Business Park REIT, and Embassy Office Parks REIT.

Mutual funds are another option for investing in REITs besides stock market transactions. The only international mutual fund in India that invests purely in international REITs at this time is Kotak International REIT Fund of Fund. In recent years, a few domestic mutual funds have also begun investing in REITs; nevertheless, their real exposure to this Real Estate Investment is fairly small. As a result, buying REIT Units on the stock market is now the only option to have meaningful exposure to real estate. Now that you are familiar with the main characteristics, advantages, and restrictions of REITs as well as how to invest in them, let's address the crucial question, "Should you invest in REITs?"

Should You Invest in REITs?

The key benefit of investing in REITs is that you may diversify your investment portfolio by gaining exposure to commercial real estate without having to deal with the headaches of owning and maintaining a number of real estate assets. Professional asset management and very low investment minimums are further advantages of investing in REITs.