REITs vs InvITs in India - Where the Yield Actually Comes From

Most people buy a REIT or an InvIT because a screener showed a 6% or a 12% yield next to it, and 12% looks like a fixed deposit that quietly ran away from home. That number is almost always the wrong thing to anchor on. The yield on these instruments is not one thing. It is a blend of interest, dividend, and your own money being handed back to you, and each of those three is taxed differently and means something completely different for the future value of what you hold.

If you do not decompose the payout, you cannot tell a genuinely high-yielding asset from one that is slowly liquidating itself and calling the proceeds “income.” This post takes apart both structures the way you should before buying either.

Start with what they actually own

Strip the jargon and both are the same idea: a SEBI-regulated trust that owns cash-generating hard assets, is legally required to pass most of that cash to unit holders, and trades on the exchange like a stock.

The difference is what sits underneath.

• A REIT (Real Estate Investment Trust) owns income-producing real estate. In India that has meant Grade-A commercial office space and, more recently, malls. The four listed names are Embassy Office Parks, Mindspace Business Parks, Brookfield India Real Estate Trust, and Nexus Select Trust (the retail/mall one).
• An InvIT (Infrastructure Investment Trust) owns operating infrastructure: power transmission lines, toll roads, gas pipelines, telecom towers. The publicly listed retail names are IndiGrid and PowerGrid InvIT (transmission), IRB InvIT (roads), and National Highways Infra Trust or NHIT (roads).

That single difference - office building versus toll road - drives everything about the yield, so hold onto it.

The naive model, and where it breaks

Here is how a first-time buyer reasons about it:

“IndiGrid pays roughly 12% and Embassy pays roughly 6%. Both are SEBI-regulated, both are backed by real assets, so IndiGrid is the better income asset. I will put my emergency-buffer money there.”

Three things are wrong with this, and they are the whole point.

Break 1: A toll road is a melting ice cube. A commercial office building can, in principle, exist and earn rent forever, and its land tends to appreciate. A transmission line or a toll road operates under a concession - a fixed 25 or 30 year right to collect a tariff, after which the asset reverts to the government or is worth scrap. Its economic value trends toward zero over the concession life. So an InvIT that is “paying 12%” is partly paying you because it has to return your capital before the asset dies. That is not the same rupee as rent.

Break 2: Part of the “yield” is your own principal. Because of Break 1, a chunk of an InvIT distribution is explicitly labelled return of capital (also called repayment of unit-holder debt or amortisation). It is not income. It is the trust giving your money back. Reinvest it and you are fine; spend it as “passive income” and you are eating the seed corn.

Break 3: The three components are taxed at three different rates. Two instruments quoting the same headline yield can leave you with very different post-tax cash depending on how the payout is split. You cannot compare headline yields at all until you split them.

So the honest version of the question is not “which yield is bigger.” It is “what is this payout made of, and what do I keep after tax.”

Anatomy of a distribution

Every rupee a REIT or InvIT distributes falls into one of three buckets. This is the single most important table in the post.

The trust is legally required to tell you the split. Every distribution comes with a breakup, and each REIT/InvIT publishes it. When someone quotes you “12% yield,” your first question should be: 12% of what mix?

A simplified example of one InvIT distribution of Rs 3.00 per unit for a quarter:

Distribution declared:      Rs 3.00 / unit
  Interest component:       Rs 1.80   -> taxed at your slab
  Dividend component:       Rs 0.30   -> tax status depends on SPV tax regime
  Return of capital:        Rs 0.90   -> not income; reduces your cost base

Cash in your bank:          Rs 3.00
"Real" income for the year: Rs 2.10 (interest + dividend)
Principal returned:         Rs 0.90

The person who models this as “Rs 3.00 of income” is overstating their yield by 30% and will be surprised at tax time. The person who models it as “Rs 2.10 income + Rs 0.90 return of my capital” understands what they own.

The 2023 return-of-capital tax change nobody reads

Until FY2023-24, the return-of-capital component was a genuine free lunch: cash in hand, no tax, and it only mattered whenever you eventually sold. The 2023 Finance Act closed the obvious loophole.

The rule now, in plain terms:

• Return of capital first reduces your cost of acquisition of the unit.
• Once the cumulative return of capital you have received exceeds your original issue price, any further return-of-capital amounts are taxed as income from other sources at your slab rate.

Worked example. You buy a unit at Rs 100. Over several years the trust returns Rs 40 of capital to you.

Original cost:                    Rs 100
Cumulative return of capital:     Rs  40
Adjusted cost of acquisition:     Rs  60   (100 - 40)

Later you sell at Rs 110:
  Capital gain = 110 - 60 = Rs 50   (not 110 - 100 = 10)

Your cost base dropped, so your eventual capital gain is larger. The tax was not avoided; it was deferred and reshaped. For InvITs, where return of capital is a big slice of the payout, this matters a lot. For REITs, where it is usually small, it barely moves the needle.

Capital gains on the units themselves

Separate from distributions, the units are listed securities and follow the post-Budget-2024 capital gains regime for business trusts:

• Held 12 months or less: short-term capital gain, taxed at 20%.
• Held more than 12 months: long-term capital gain, taxed at 12.5% on gains above the Rs 1.25 lakh annual exemption shared with equity.

So a long-term holder pays 12.5% on price appreciation and slab rate on the interest slice of the payout. This is why the interest-heavy nature of these distributions is the real tax drag, not the capital gains.

How the money flows

        Rent / tolls / transmission tariff
                     |
            +--------v---------+
            |   SPVs (the      |   pay full corporate tax
            |   actual asset-  |   OR opt for 22% regime
            |   owning cos)    |
            +--------+---------+
                     |  interest on unit-holder debt + dividend + capital repayment
            +--------v---------+
            |   The Trust      |   must distribute >= 90% of
            |   (REIT / InvIT) |   net distributable cash flow
            +--------+---------+
                     |  quarterly / half-yearly distribution
            +--------v---------+
            |   You (unit      |   split into interest / dividend /
            |   holder on NSE) |   return-of-capital, each taxed apart
            +------------------+

The 90% distribution mandate is the feature that makes these instruments income vehicles at all. It is also the constraint: the trust cannot retain much cash to reinvest, so growth comes almost entirely from acquiring new assets, usually funded by fresh borrowing or new unit issuance. That is why leverage and the sponsor’s acquisition pipeline matter more here than in a normal company.

Where the yield actually comes from

Now the whole point lands. Two instruments, roughly the same era, very different payout DNA:

The REIT’s lower headline yield is closer to real, recurring income, and it comes with a shot at capital appreciation because the buildings and land can be worth more later. The InvIT’s higher headline yield is partly return of your own capital, and the asset base is contractually shrinking, so you should mentally amortise the price toward zero over the concession unless the sponsor keeps buying new assets.

Neither is better. They are different trades. A REIT is closer to “own the building, collect the rent.” An InvIT is closer to a self-amortising bond with equity risk - high cash flow now, principal returned along the way, limited terminal value. If you judge the InvIT as if it were a REIT, you will overpay and misread the falling price as a loss when it is partly by design.

A quick way to sanity-check any of these

Before buying, pull three numbers from the latest investor presentation. They are all published.

# Numbers you copy from the trust's quarterly distribution disclosure
distribution_per_unit = 12.0      # trailing 12-month payout, Rs
price_per_unit        = 130.0     # current market price, Rs
return_of_capital_pct = 0.35      # capital-repayment share of the payout

headline_yield = distribution_per_unit / price_per_unit
income_yield   = headline_yield * (1 - return_of_capital_pct)

# Rough post-tax income yield for a 30% slab investor, treating the
# taxable slice as mostly interest (worst case, most conservative)
post_tax_income_yield = income_yield * (1 - 0.30)

print(f"Headline yield:        {headline_yield:6.2%}")
print(f"True income yield:     {income_yield:6.2%}")
print(f"Post-tax income yield: {post_tax_income_yield:6.2%}")
# Headline yield:         9.23%
# True income yield:      6.00%
# Post-tax income yield:  4.20%

The 9.23% that got you interested is a 4.20% post-tax income yield once you strip out the returned capital and pay slab tax on the rest. That is a perfectly fine number - it is roughly a good FD after tax, with more upside and more risk - but it is not 9.23%, and the gap is entirely explained by structure, not by anyone lying to you.

Liquidity, the quiet catch

Both trade on NSE and BSE, and SEBI has cut the trading lot to a single unit, so entry is easy. Exit is where reality bites. Daily traded volumes on most of these names are thin compared to large-cap equity. For a retail buyer putting in a few lakhs, this is a non-issue. If you ever need to exit a large position quickly, you will move the price against yourself. Treat these as buy-and-hold income assets, not something you trade around events.

There is also concentration risk that an index fund would spare you: a single REIT is a handful of office parks in two or three cities; a single InvIT can be one grid of transmission lines. Occupancy shocks, tariff order changes, or a single large tenant leaving hit the whole holding. Interest rates matter too - both are long-duration, rate-sensitive instruments, and their prices fall when rates rise, exactly like bonds.

Where they fit in a portfolio

Honest placement:

• Not your emergency fund. Price volatility and thin exit liquidity disqualify them.
• Not a bond substitute for capital safety. There is no principal guarantee and no DICGC-style backstop.
• Yes as a distinct income sleeve, real-asset exposure that is not equity and not debt, in the 5-10% of portfolio range for someone who wants regular cash flow and understands the payout is part return of capital.
• REITs suit investors who want rent-like income plus a chance at appreciation and prefer a mostly-taxable-but-recurring stream.
• InvITs suit investors who explicitly want high current cash yield and will either reinvest the return-of-capital portion or are fine with the asset winding down. Retirees who want maximum cash today and do not need to leave the corpus intact can rationally prefer them.

Honest assessment

What works: these are among the few clean ways for an Indian retail investor to own institutional-grade real estate and infrastructure, they are SEBI-regulated with mandatory disclosure, the 90% payout rule forces cash back to you, and the post-tax income is a reasonable competitor to an FD with added upside.

What does not: the headline yield is genuinely misleading on InvITs because of the return-of-capital component, the interest-heavy payout is taxed at your slab so high earners keep less than they expect, liquidity is thin on exit, and single-trust concentration and rate sensitivity are real.

What to actually do: pull the distribution split from the latest disclosure and compute the true income yield and post-tax yield before you look at the headline. For a REIT, expect most of the payout to be recurring income with some appreciation. For an InvIT, expect to receive part of your principal back and plan to reinvest it, and value the unit as a decaying asset unless the sponsor keeps acquiring. Size the whole category at 5-10% of the portfolio, hold for more than 12 months to get the 12.5% capital gains rate, and never mistake a returned rupee of capital for a rupee of income.