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?
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- ABoth Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
- BBoth Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
- CStatement-I is correct but Statement-II is incorrect
- DStatement-I is incorrect but Statement-II is correct
Show answer
Answer: (D) Statement-I is incorrect but Statement-II is correct
Statement-I is wrong:
Interest income from InvIT deposits is NOT tax-exempt — it is fully taxable as per your income tax slab under 'Income from Other Sources.'
Statement-II is correct:
Under the SARFAESI Act, 2002, an InvIT that borrows qualifies as a 'borrower.'
So Statement-I is wrong but Statement-II is correct.
Answer is (d).
InvITs were introduced in India in 2014 as a way to raise funds for infrastructure projects, and their tax treatment directly affects investor returns.
The government has been promoting InvITs as an alternative investment option, making their exact tax implications a current policy focus for UPSC.
The question tests whether students can distinguish between different types of InvIT income and understand InvITs' legal status under financial laws.
Infrastructure Investment Trusts (InvITs)
Indian Economy InvITs Infrastructure Investment Trusts
Infrastructure Investment Trusts (InvITs): Structure, Taxation & Regulation
InvITs are SEBI-regulated trusts that pool money to invest in infrastructure assets like roads, power transmission
Interest income from InvIT distributions is fully taxable under 'Income from Other Sources'
InvITs qualify as 'borrowers' under SARFAESI Act when they take loans
Minimum investment is ₹10 lakh per investor (lower than AIFs)
What are InvITs
Infrastructure Investment Trusts (InvITs) are SEBI-regulated collective investment vehicles that pool funds from investors to invest in infrastructure assets. They work like REITs but focus on infrastructure projects instead of real estate.
InvIT vs REIT Comparison
Aspect | InvIT | REIT |
|---|---|---|
Focus | Infrastructure assets (roads, power transmission, telecom towers) | Real estate (office buildings, malls, warehouses) |
Minimum Investment | ₹10 lakh | ₹2 lakh |
Distribution Frequency | Quarterly | Quarterly |
Regulator | SEBI | SEBI |
Listing | Mandatory on stock exchange | Mandatory on stock exchange |
Key Features
Must distribute 90% of net distributable cash flows to unit holders
Sponsor must hold minimum 15% stake for 3 years post-listing
Can invest in completed and revenue-generating infrastructure projects
Portfolio must have 80% in completed projects, max 20% in under-construction
Professional management through Investment Manager appointed by sponsor
Trap: Statement I claims interest income from InvITs is tax-exempt — it's fully taxable under 'Income from Other Sources'
Confusion: Students mix InvIT tax treatment with tax-free bonds or ELSS exemptions
Distinction: InvITs distribute both interest (from debt instruments) and dividends (from equity) — both are taxable for investors
SARFAESI: InvITs qualify as 'borrowers' when they take loans, giving lenders enforcement rights
InvIT Taxation & Income Classification
Indian Economy tax dividend interest income
InvIT Income Taxation: Interest vs Dividend Treatment
All InvIT distributions to investors are fully taxable — no exemptions
Interest income from InvITs taxed under 'Income from Other Sources' at slab rates
Dividend income from InvITs also fully taxable since dividend tax abolition in 2020
Tax Treatment Overview
Income from InvIT investments is fully taxable for individual investors. The tax treatment depends on whether the distribution is classified as interest or dividend income.
InvIT Income Tax Treatment
Income Type | Tax Head | Tax Rate | TDS |
|---|---|---|---|
Interest from debt securities held by InvIT | Income from Other Sources | As per income tax slab rates | Yes, as applicable |
Dividend from equity held by InvIT | Income from Other Sources | As per income tax slab rates | Yes, 10% TDS if dividend > ₹5,000 |
Capital gains on sale of InvIT units | Capital Gains (Short/Long term) | 15% LTCG if held >36 months | No TDS on sale |
Key Tax Points
No tax exemption for any InvIT income — unlike PPF, ELSS, or tax-free bonds
TDS applicable: InvIT must deduct tax at source on distributions above threshold
Holding period for LTCG on InvIT units is 36 months (like debt mutual funds)
InvIT itself gets pass-through status — no tax at trust level on distributed income
Major Trap: Question claims interest income is 'exempted from tax' — this is completely wrong
Confusion: Students may think InvITs get same tax benefits as infrastructure bonds or 54EC bonds
Dividend Tax Change: Post-2020, all dividends are taxable in investor's hands — no more dividend distribution tax
SARFAESI Act & Borrower Definition
Indian Economy SARFAESI Act borrowers
SARFAESI Act 2002: Borrower Definition & InvIT Coverage
SARFAESI Act 2002 empowers secured creditors to recover NPAs without court intervention
InvITs qualify as 'borrowers' under the Act when they take secured loans
Applies to loans ₹1 lakh and above with security interest
SARFAESI Act Purpose
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 enables banks and financial institutions to recover bad loans by taking possession of borrower assets without lengthy court procedures.
Who Qualifies as Borrower under SARFAESI
Entity Type | Borrower Status | Key Condition |
|---|---|---|
Companies (including InvITs) | ✓ Yes | Any secured loan |
Partnerships, LLPs | ✓ Yes | Any secured loan |
Individuals | ✓ Yes | Non-agricultural purpose loans |
Farmers | ✗ No | Agricultural loans protected |
Trusts, Societies | ✓ Yes | Commercial borrowing only |
SARFAESI Enforcement Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Loan becomes NPA**
90+ days overdue for most loans`"]
s2["`**60-day notice**
Bank issues demand notice under Section 13(2)`"]
s3["`**Asset possession**
Bank can take possession after notice period`"]
s4["`**Asset sale/lease**
Bank manages or sells asset to recover dues`"]
s1 --> s2
s2 --> s3
s3 --> s4InvIT as Borrower
InvITs can borrow to fund infrastructure acquisitions or development
When InvIT defaults, lenders can use SARFAESI provisions for asset recovery
InvIT's infrastructure assets can be attached as security under the Act
Statement II is correct — InvITs are recognized borrowers under SARFAESI
Statement II Verification: InvITs DO qualify as borrowers — this statement is correct
Scope Confusion: SARFAESI covers all corporate entities including trusts like InvITs and REITs
Agricultural Exemption: Only agricultural loans to farmers are exempt from SARFAESI