Real Estate Investment Trusts (REITs) allow investors to own a small stake in income-generating commercial properties such as office parks, malls, warehouses, and hotels without directly buying real estate. On the other hand, REIT mutual funds provide exposure to REITs and real estate stocks through a professionally managed portfolio.
While both provide access to the real estate sector, they differ in returns, taxation, and suitability. Vaibhav Porwal, Co-founder of Dezerv, explains their structure and the key differences.
What is a REIT?
A REIT is a listed investment vehicle that owns and manages income-generating commercial properties and distributes rental income to investors. SEBI requires a REIT to distribute at least 90% of its net distributable cash flow and keep at least 80% of its assets in completed, rent-generating buildings rather than in land or projects under construction.
Investors can buy REIT units on the stock exchange, similar to shares. India currently has six listed REITs. Five are office-led, and only one is a listed retail REIT.
They provide a steady, rising income and appreciate gradually. REIT prices move inversely with interest rates, so the rate-cut cycle has lifted unit prices even as the underlying rental income has continued to compound. It works in reverse too.
Established REITs have delivered distribution yields of around 6-7% before tax, with total returns, including price appreciation, in the mid-to-high teens.
What are REIT mutual funds?
REIT mutual funds provide real estate exposure through a single investment, eliminating the need to select individual REITs.
These funds can be structured in two ways: funds that directly hold REIT units through dedicated or index funds, and funds of funds (FoF) that invest in other REIT funds, usually overseas.
The category is now evolving after SEBI reclassified REITs as equity-related instruments for mutual funds and SIFs, enabling domestic REIT-oriented passive funds.
However, these products are not pure REIT investments. Since passive funds cannot combine REITs and InvITs in one index, new funds typically combine listed REITs with real estate stocks, with around 60% allocation to REITs and 40% to real estate equities.
Investors should understand this mix before investing. Around 40% exposure to real estate developer stocks behaves like cyclical equity rather than rental income. This makes such funds more volatile than direct REIT investments.
Since domestic REIT funds are new, they do not have a long performance history. Investors can refer to the Nifty REITs & Realty Total Return Index, which has delivered around 17.6% annualised returns since its inception in July 2021 and 19.1% over the last three years.
How are REITs and REIT mutual funds taxed?
For REIT mutual funds, taxation depends on their classification. Since many REIT funds do not meet the 65% equity allocation requirement to qualify as equity funds, short-term gains are taxed at the investor’s slab rate. Long-term gains after holding for more than 24 months are taxed at 12.5% without indexation.
Direct REITs are taxed based on the income component. Interest and dividend income are taxed at the investor’s slab rate. Return of capital is not taxed immediately but reduces the acquisition cost and is taxed when units are sold, if applicable.
Listed REIT units held for more than 12 months qualify as long-term capital gains and are taxed at 12.5% after the ₹1.25 lakh annual exemption.
Overall, neither option has a clear tax advantage. REIT mutual funds can defer taxation if you invest in the growth option, because the fund itself pays no tax on the interest and dividends it receives. But listed REITs may be more favourable for capital gains due to the shorter holding period and exemption benefit.
Key differences between REITs and mutual funds
| Feature | REIT | REIT Mutual Fund |
| Return source | Rental distributions plus REIT unit price movement | Returns from REITs plus real estate stock performance |
| Long-term returns | Linked to the performance of the selected REIT, including yield and price appreciation | A mix of REIT income and real estate equity returns; higher equity exposure can increase volatility |
| Suitable for | Investors seeking regular income and willing to select REITs | Investors seeking diversification and convenience without tracking individual REITs |
| Key factors to check | Sponsor quality, occupancy, tenant mix, leverage, rental growth, distribution sustainability | REIT allocation, real estate stock exposure, tracking error, and expense ratio |
| STCG tax | Gains on listed REIT units held up to 12 months are taxed at a 20% flat rate | Gains on units held up to 24 months taxed at slab rate (if classified as “other” funds) |
| LTCG tax | After 12 months: 12.5% tax after ₹1.25 lakh annual exemption | After 24 months: 12.5% without indexation |
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
About the Author
Sheetal Goel is a Content Producer at Livemint, where she covers corporate developments, personal finance, business trends, markets, and SEBI-related updates. She focuses on simplifying complex financial concepts and presenting them in a clear, reader-friendly manner, thereby helping audiences better understand investment trends, personal finance, and market developments. Her writing focuses on making finance more accessible to everyday readers while maintaining clarity, accuracy, and relevance.
She holds a degree in Economics (Hons.) along with an MBA in Finance, which has helped her develop a strong foundation in financial analysis, market understanding, and business reporting. Before joining journalism, she worked with finance and broking firms, where she closely followed market developments, investment strategies, and evolving industry trends. This practical exposure strengthened her understanding of financial markets. She has also written content across multiple formats and platforms, including YouTube, LinkedIn, and Instagram.
Over time, she has developed expertise in covering market-linked stories, investor-focused topics, and regulatory updates in a simplified yet informative style. She also enjoys reading and listening to Hindi poetry, reflecting her appreciation for literature and creative expression beyond the world of markets and numbers.
