UPSC Prelims 2023 Q21: Indian Economy – Financial Markets & Capital Markets

UPSC Prelims 2023, General Studies Paper I · Indian Economy

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?

(a) Both Statement - I and Statement - II are correct and Statement - II is the correct explanation for Statement - I
(b) Both Statement - I and Statement - II are correct and Statement - II is not the correct explanation for Statement - I
(c) Statement - I is correct but Statement - II is incorrect
(d) Statement - I is incorrect but Statement - II is correct

Answer: (d) Statement - I is incorrect but Statement - II is correct

Explanation

Infrastructure Investment Trusts (InvITs) — tax and SARFAESI

InvITs pool money from investors to own income-earning infrastructure such as roads, power lines and pipelines.

Income from an InvIT	Tax treatment for the investor
Interest	Taxable at the investor's slab rate
Dividend	Exempt, if the project company (SPV) has not opted for the concessional tax regime
Repayment of debt (capital return)	Taxable since Finance Act 2023 in some cases

Statement I — incorrect. It reverses the rule: interest is taxable, while dividends are generally exempt.

Statement II — correct. The Finance Act 2021 amended SARFAESI so that InvITs and REITs count as borrowers. Lenders can enforce security against them.

Answer: (d) Statement - I is incorrect but Statement - II is correct.

Why each option is right or wrong

(a) Incorrect. Statement I is false; interest from InvITs is taxable.
(b) Incorrect. Both are not correct; Statement I reverses the tax treatment.
(c) Incorrect. Statement I is the false one, and Statement II is true.
(d) CORRECT. InvIT interest is taxable (not exempt), and InvITs are borrowers under SARFAESI since 2021.

Key point

InvITs: interest taxable, dividends generally exempt; since 2021, InvITs and REITs are 'borrowers' under SARFAESI.

Remember

InvIT interest income is taxable; InvITs are recognised as borrowers under SARFAESI.

Common mistakes

Reversing interest and dividend tax rules for InvITs.
Not knowing the 2021 SARFAESI amendment that brought InvITs and REITs in as borrowers.
Confusing InvITs (infrastructure) with REITs (real estate); both are regulated by SEBI.

Exam tip

InvIT = SEBI-regulated trust (2014 rules). Its debt can now be enforced under SARFAESI, like a company's.

Sources

SEBI (Infrastructure Investment Trusts) Regulations, 2014
Finance Act, 2021 — Amendment to SARFAESI Act, 2002
Income-tax Act, 1961 — Section 10(23FC)

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