Edelweiss Nifty REITs & Realty Index Fund: This won't get equity tax benefits -- here's how gains will be taxed

India's first REITs-oriented index fund may offer investors a new way to invest in listed real estate, but it comes with a tax treatment that differs significantly from traditional equity mutual funds. According to Edelweiss Mutual Fund's tax note, the Edelweiss Nifty REITs & Realty Index Fund will be taxed under the residual "other" category under the Income-tax Act, 2025, rather than as an equity-oriented mutual fund.

The fund, which opens for subscription on August 5 and closes on August 19, is India's first index fund tracking the Nifty REITs & Realty Total Return Index, offering exposure to listed REITs and real estate companies through a single investment vehicle.

Why it isn't taxed like an equity fund

Although REIT units are classified as equity instruments by SEBI, that classification does not determine how a mutual fund is taxed.

The tax note explains that the scheme does not qualify as an equity-oriented fund because only 40% of the portfolio is invested in equity shares of listed domestic companies, well below the statutory requirement of 65%. Importantly, REIT units do not count as equity shares of domestic companies for tax purposes, even though SEBI classifies them as equity instruments.

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The fund also fails to qualify as a "specified mutual fund" since REIT units are neither debt nor money market instruments under the Income-tax Act. As neither condition is met, the scheme is automatically classified under the residual "other" category.

How investors will be taxed

The tax implications are materially different from those applicable to equity mutual funds.

According to the tax note:

Short-term capital gains (STCG) on units held for up to 24 months will be taxed at the investor's applicable income-tax slab rate.
Long-term capital gains (LTCG) on units held for more than 24 months will be taxed at 12.5% without indexation.
If the units are listed on a recognised stock exchange in the future, the holding period for long-term capital gains would reduce to 12 months, while the tax rates would remain unchanged.

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The note also states that Income Distribution-cum-Capital Withdrawal (IDCW) payouts will be taxed at the investor's slab rate. A 10% tax deduction at source (TDS) will apply where resident investors receive distributions exceeding Rs 10,000 in a financial year.

Higher REIT exposure won't change taxation

One question investors may have is whether the tax treatment could change if the fund increases its allocation to REITs over time.

According to Edelweiss, the answer is no.

The tax note clarifies that increasing REIT exposure would not help the scheme qualify as an equity-oriented fund because REIT units are not considered equity shares of domestic companies under tax law. Similarly, REITs are not classified as debt or money market instruments, meaning the fund would still not qualify as a specified mutual fund. Consequently, the scheme would continue to be taxed under the "other" category" irrespective of its REIT allocation.

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What this means for investors

The Edelweiss Nifty REITs & Realty Index Fund gives retail investors low-cost access to India's listed real estate ecosystem, but its tax treatment differs from conventional equity mutual funds. Investors evaluating the NFO should therefore factor in the slab-rate taxation on short-term gains and the 12.5% long-term capital gains tax while assessing expected post-tax returns. The fund's unique structure may broaden investment options, but understanding its taxation is likely to be as important as understanding its investment strategy.

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