In the current landscape where the real estate sector is in dire need of funds, the anticipated rollout of Real Estate Mutual Funds (REMFs) has yet to begin, despite being granted the green light three months prior. This delay is largely attributable to ambiguous guidelines concerning their tax treatment.
REMFs, hailed as a crucial avenue for retail investors to engage with the thriving realty sector, face setbacks as the Securities and Exchange Board of India (Sebi) and the finance ministry continue deliberations on the taxation aspects associated with such schemes.
To alleviate concerns, the Central Board of Direct Taxes (CBDT) has proposed to afford REMFs the same tax position as equity-oriented mutual funds, aligning with requests from Sebi. Consequently, this implies that these funds will be exempt from dividend distribution tax and investors will not need to pay long-term capital gains tax upon selling their shares.
However, the Income Tax Act of 1961 stipulates that equity-oriented mutual funds must allocate a minimum of sixty-five percent towards direct investment in the equity of listed companies. Notably, the rules established by Sebi dictate that REMFs must allocate at least thirty-five percent of their total funds to real estate assets, with the remainder directed towards mortgage-backed securities, debt instruments, and equity securities from realty firms. This requirement complicates their qualification as equity-oriented mutual funds.
An expert remarked, "Given the REMF structure delineated by Sebi, these funds will frequently resemble debt funds." Unlike equity-linked funds, debt funds invite both capital gains tax and dividend distribution tax. This presents challenges, as investors are inadvertently denied the tax advantages afforded to equity-oriented funds, according to official sources.
- Krishnan, a tax partner in real estate at Ernst & Young, stated, "For clarity and to effectively incorporate REMFs, the finance ministry will need to amend the classification of equity-oriented mutual funds within the Income Tax Act."