UPSC Prelims 2023 Question:

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:

• • Infrastructure investment trusts (InvITs) are a type of investment vehicle that is similar to a mutual fund. The Securities and Exchange Board of India is in charge of this type of investment. The units of these trusts, which are also called "InvITs," are listed on different places to trade, such as stock exchanges. InvITs are a mix of equity instruments and debt instruments.
  • InvITs are set up to get investors to put their money into the infrastructure sector. These types of investments take money from several investors and put it into things that make money. The cash flow is then given back to investors as dividend income. When compared to Real Estate Investment Trusts, or REITs, InviTs are similar in how they are set up and how they work.
  • InvITs have two types of returns for investors – Dividend Income and Capital Gains. Here is the tax treatment of each of these incomes:
    • Tax on Dividend and Interest Income: Any dividend or interest income from an InvIT investment is taxed at the individual Income Tax Slab rate. Every year, investors must report this income on their Income Tax Return.
      
      

• Capital Gains Tax: An investor only has to pay capital gains tax if they sell their InvITs units. Short-Term Capital Gains (STCG) tax is 15% on income from the sale of InvITs units held for up to 3 years. Long-term capital gains (LTCG) tax of 10% is charged on the sale of InvITs units held for more than 3 years if the income is more than Rs. 1 lakh. So, statement 1 is not correct.
  
  

• On February 11, 2021, the Finance Ministry said that the Government of India would be making changes to:
  • the Securities Contracts (Regulation) Act (SCRA) 1956;
  • the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002; and
  • the Recovery of Debts Due to Banks and Financial Institutions Act ('Recovery of Debts Act') 1993.
  • The SARFAESI Act and the Recovery of Debts Act have also been changed to give domestic lenders more ways to get their money back. With these changes, the definition of "borrower" in the acts is expanded to include a pooled investment vehicle. When combined with the definition of "secured creditor" in the SARFAESI Act, this means that a debenture trustee for listed secured debt securities issued by an InvIT or REIT will be able to use the protections and enforcement mechanisms in the acts. In the same way, eligible lenders can now take advantage of the Recovery of Debts Act when it comes to debt securities issued by an InvIT or REIT. So, statement 2 is correct. 
    
    

Therefore, option (4) is the correct answer. 

Subject: Economics | Financial Sectors and Capital Market