Indian income tax | Tax deducted at source

Section 194LBA: TDS on Income Distributed by Business Trusts (REITs and InvITs)

Section 194LBA of the Income-tax Act, 1961 governed tax deduction at source on specified pass-through income distributed by business trusts to resident and non-resident unit holders. The applicable rate depends on the income category and the recipient's residential status.

Reviewed: 27 October 2026 | Historical section under the Income-tax Act, 1961; see the Income-tax Act, 2025 transition below.

10%Resident unit holders: specified interest and rental distributions

5%Non-resident unit holders: qualifying interest under section 10(23FC)(a)

Rates in forceNon-resident unit holders: qualifying rental income under section 10(23FCA)

What is Section 194LBA?

Under section 194LBA, a business trust distributing income of the kind covered by section 115UA and specified in section 10(23FC)(a) or section 10(23FCA) must deduct tax before crediting or paying that income to unit holders. A business trust may be a qualifying real estate investment trust (REIT) or infrastructure investment trust (InvIT).

The provision is concerned with specified pass-through interest and rental income. Not every distribution by a business trust automatically attracts the same TDS treatment. Dividend income, other taxable income and capital repayments require separate classification under the applicable provisions.

Section 194LBA TDS rates under the 1961 Act

Income distributed by business trust	Recipient	TDS rate	Legal provision
Interest income described in section 10(23FC)(a)	Resident unit holder	10%	Section 194LBA(1)
Rental income described in section 10(23FCA)	Resident unit holder	10%	Section 194LBA(1)
Interest income described in section 10(23FC)(a)	Non-resident individual / other non-resident non-company or foreign company	5%	Section 194LBA(2)
Rental income described in section 10(23FCA)	Non-resident individual / other non-resident non-company or foreign company	Rates in force	Section 194LBA(3)

Threshold: Section 194LBA did not specify a minimum rupee threshold for these distributions. TDS could apply from the first rupee, subject to statutory exemptions, valid relief or other applicable law.

Important: The stated percentages are the statutory rates for the specified income streams. For non-resident recipients, verify the applicable surcharge, health and education cess, tax treaty relief and documentation. The phrase "rates in force" is not a fixed 5% or 10% rate.

Definitions and connected legal provisions

Section 115UA - taxation of business trusts

Section 115UA provides the special pass-through framework for specified income of business trusts and their unit holders. The character of income received by a unit holder is important for determining the tax treatment and TDS category.

Section 10(23FC)(a) - interest from a special purpose vehicle

This provision addresses specified interest income received by a business trust from a special purpose vehicle (SPV). Distributions attributable to that interest stream are covered by the interest-related rules in section 194LBA.

Section 10(23FCA) - rental income of a REIT

This provision concerns qualifying rental income from real estate assets directly owned by a qualifying real estate investment trust. Such distributed rental income is treated separately from SPV interest, particularly for non-resident unit holders.

Meaning of business trust

For the 1961 Act, the definition is contained in section 2(13A), read with the relevant securities regulatory framework. The legal classification of a trust and the source of each distribution should be confirmed before selecting the TDS rate.

When is tax deducted and what compliance is required?

Tax is deducted at the earlier of credit to the unit holder's account or actual payment, including payment by electronic transfer, cheque, draft or other mode. A credit to a suspense or similar account may require examination under the applicable TDS rules.

Business trusts and persons responsible for withholding should determine the character of each distribution, collect valid PAN and non-resident tax documentation, deposit the tax within prescribed timelines, file the applicable TDS statement and issue the required TDS certificate. Under the earlier reporting framework, resident and non-resident payments generally followed the relevant Form 26Q or Form 27Q reporting requirements.

Non-resident treaty claims should be considered only after checking tax-residency certificates, required declarations, beneficial ownership and other treaty conditions. Incorrect PAN or missing documentation may alter withholding requirements.

Examples of TDS calculations

Example 1: Interest distributed to a resident

A business trust distributes Rs. 1,20,000 of qualifying SPV interest to a resident unit holder. Under section 194LBA(1), TDS at 10% equals Rs. 12,000; the balance is Rs. 1,08,000, ignoring other adjustments.

Example 2: Interest distributed to a non-resident

Qualifying interest of Rs. 2,00,000 is distributed to a non-resident unit holder. At the statutory 5% rate, the base deduction is Rs. 10,000, before any applicable surcharge, cess or legally available treaty adjustment.

Example 3: Rental distribution to a non-resident

A REIT distributes Rs. 1,50,000 attributable to qualifying rental income to a non-resident. Section 194LBA(3) requires withholding at rates in force; the actual deduction must be calculated using the recipient's applicable law and any valid treaty entitlement rather than assuming the 5% interest rate.

Income-tax Act, 2025: position from 1 April 2026

The Income-tax Act, 2025 came into force on 1 April 2026. Section 194LBA is the historical citation for the 1961 Act. For a payment governed by the new Act, the deductor must consult the relevant business-trust distribution entries in section 393 and its TDS tables, along with the corresponding provisions on business trusts and unit-holder income. Apply the law effective on the date of the transaction; do not assume the old section number is the operative provision for a new-Act payment.

Where a payment or return relates to an earlier tax period, the 1961 Act and its applicable transitional or savings provisions may remain relevant. Always check the latest statutory text, rules and forms on the official portal before filing.

Frequently asked questions

Does Section 194LBA apply to all REIT and InvIT distributions?

No. The section identifies specified distributed interest and rental income. The treatment of dividends, other income and repayment of capital must be considered separately.

Is the TDS rate always 10%?

No. Under the 1961 Act, 10% generally applies to the specified distributions to resident unit holders; 5% applies to qualifying interest paid to non-residents, and rental distributions to non-residents are subject to rates in force.

Is there an annual exemption threshold?

No monetary threshold was stated in section 194LBA for the specified payments.

Can a non-resident claim treaty benefits?

Potentially, subject to the applicable treaty, domestic law and required documents. A treaty does not automatically change the withholding rate without satisfying the legal conditions.

Official law and reference links

This article is general legal information, not a substitute for transaction-specific tax advice. Check the operative statute and notifications before withholding or filing.