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Understanding Infrastructure Investment Trusts (InvITs)

Have you ever wondered about investment opportunities beyond stocks and bonds?

Infrastructure Investment Trusts, commonly known as InvITs, provide an alternative investment avenue with regular dividend yield and diversification benefits.

In this article, we’ll explore InvITs, their lifecycle journey, benefits, shortcomings, and tax implications.

What are InvITs?

Infrastructure Investment Trusts (InvITs) are like mutual funds managed by designated fund managers. They allow investors to invest in infrastructure projects.

The projects typically include roads, power transmission lines, ports, or other operational infrastructure projects that generate steady cash flows.

The cash flows generated are distributed as dividends among investors.

Their framework is similar to REITs and can be traded on stock exchanges.

InvITs are regulated by SEBI and are required to:

➡️ Invest at least 80% of their total assets in completed infrastructure projects that can generate income.

➡️ Distribute at least 90% of their income as dividends to their unitholders.

Benefits of Investing in InvITs

Diversification: Investing in InvITs allows individuals to diversify their portfolios by gaining partial ownership of infrastructure projects. This diversification offers exposure to a completely new asset class.

Dividend Yield: InvITs predominantly invest in completed projects, resulting in steady cash flows. These cash flows are then distributed to investors as dividends, offering a consistent income stream.

Professional Management: Despite owning a portion of infrastructure assets through InvITs, investors are not burdened with project management responsibilities. Designated managers ensure optimal performance with minimal hassle for investors.

Shortcomings of Investing in InvITs

Lower Liquidity: Compared to more established investment avenues, such as stocks and bonds, InvITs may have lower liquidity due to their relatively new presence in the market.

Disrupted Cash Flows: Changes in income or tariff structures for the underlying infrastructure projects can disrupt the cash flows.

Taxation on InvIT Earnings

Dividend/Interest Income: Any dividends or interest income earned from InvITs is fully taxable according to the investor’s income tax slab rate.

Capital Gains Tax on InvITs

Short-Term Capital Gains (STCG): If InvIT units are sold within three years of purchase, the gains are taxed at 15%.

Long-Term Capital Gains (LTCG): Gains from selling InvIT units after three years are taxed at 10%, with Rs 1 lakh exemption.

Summing Up

InvITs help in asset diversification, while dividend yield is an added bonus for investors.

However, factors such as liquidity and taxation must be considered before making investment decisions.

*Disclaimer – This is for information purposes only and not an investment advice.