Disclaimer: Education only, not investment, tax or legal advice. Check linked primary sources; items marked [check the source] were not confirmed from a primary source.
In simple words (if you are in class 10)
Think of two ways to run a mango orchard with your friends.
Way 1: a company. You form "Mango Pvt Ltd". The company sells mangoes, pays tax on its profit, and then the board decides whether to give you any dividend. They might keep the money to buy another orchard. You also wait for the company to grow so your share price goes up.
Way 2: a trust (InvIT style). The orchard is put in a trust. A rule says: after paying workers and the bank, at least 90 out of every 100 rupees of spare cash must be given to the owners. Because most of the money reaches the owners, the tax is mostly collected from the owners, not twice (once from the trust and again from you).
A company is like a growth plant that keeps its seeds to grow bigger. An InvIT is like a fruit tree whose job is to give you fruit every season.
The professional view
Side-by-side comparison
| Feature | Listed infrastructure company | InvIT (business trust) |
|---|---|---|
| Legal form | Company under Companies Act, 2013 | Trust under Indian Trusts Act, 1882, registered with SEBI |
| Regulator | SEBI (LODR) + MCA | SEBI (InvIT Regulations, 2014 + Master Circular) |
| Payout | Board discretion | At least 90% of net distributable cash flows (NDCF) must be distributed |
| Activity | Can do anything in its objects, including construction and EPC | Restricted: mainly completed, revenue-generating infrastructure (public InvITs: at least 80%) |
| Leverage | Contractual and covenant limits only | Regulatory cap on consolidated net borrowings, up to 70% of asset value with conditions |
| Tax on income from SPVs | Taxed at company level; dividends taxed again for shareholders | Interest and dividend from SPVs exempt at trust level; taxed (or exempt) in unitholders' hands by character |
| Valuation | Market only, no mandatory valuation | Independent valuation at least annually, more often for public InvITs |
| Life | Perpetual | Effectively tied to asset lives and concessions unless new assets are acquired |
| Investor base | Equity investors | Yield investors: pension, insurance, sovereign funds, retail seeking income |
Sources for the InvIT column: InvIT Regulations; CARE Ratings InvIT methodology; tax treatment in Part 4.
Reason 1: avoiding "tax leakage" on the same rupee
In a HoldCo company structure, an operating SPV pays corporate tax, then pays dividend to the HoldCo, then the HoldCo pays dividend to shareholders, who are taxed again. The InvIT route lets the SPV pay interest on shareholder loans to the InvIT. That interest is deductible for the SPV, exempt in the InvIT's hands, and taxable in the unitholder's hands. The tax is paid once, at the investor's own rate. This is the "pass-through" design of the Income-tax law (section 115UA and section 10(23FC) of the 1961 Act, now carried into section 223 and Schedule V of the Income-tax Act, 2025: see Part 4).
A worked illustration (hypothetical, simplified, ignoring MAT, surcharge and cess):
| Item | Company route | InvIT route (all paid as interest) |
|---|---|---|
| SPV cash profit before interest and tax | ₹100 | ₹100 |
| Interest to parent | 0 | ₹100 (deductible) |
| SPV tax at 25.17% (22% concessional rate + 10% surcharge + 4% cess; for business-trust SPVs on this regime the 2026 amendment raised the surcharge to 25%, about 28.6% all-in, see Part 4) | ₹25.17 | ₹0 |
| Cash reaching the investor | ₹74.83 (then taxed again as dividend) | ₹100 (taxed once at investor's slab) |
In real life the SPV will not be able to deduct all of it (thin-capitalisation and interest limitation rules, losses, depreciation, and the shareholder-loan size all matter), so treat this as the direction of the benefit, not its size.
Reason 2: a forced payout attracts yield investors
The 90% NDCF rule is a commitment device. Investors know cash will not be trapped in empire-building. That predictability is why long-term investors accept a lower return than they would demand from an equity in a developer. Lower required return means a higher price for the same road, which is exactly what a seller (developer or NHAI) wants.
Reason 3: ring-fenced, operating-only risk
Public InvITs must keep most of their value in completed, revenue-generating assets, so construction risk (land, approvals, cost overrun) mostly stays with the developer. Investors buy a "post-COD" risk profile: traffic, tariff, O&M and refinancing.
Reason 4: regulated leverage and governance
Debt is capped by regulation, credit ratings are required above set levels, unitholders vote on large related-party deals, and unitholders with 10% or more can nominate a director to the investment manager's board (SEBI circulars of 11 Sep 2023, summarised by Shardul Amarchand Mangaldas). See Part 3.
Why not always use an InvIT? The trade-offs
- Less flexibility: cannot retain cash to grow organically; new assets need new units or new debt.
- Finite life risk: if no new assets are bought, a toll-road InvIT shrinks as concessions run off.
- Compliance cost: valuation, trustee, ratings, quarterly/half-yearly reporting.
- Structuring friction: SPV-level loan covenants, lender consents for change of control, stamp duty and NHAI consents on transfer.
- Not for development: a developer still needs a company to bid, build and take construction risk.
A director's lens: when does the InvIT win?
The InvIT tends to win when (a) assets are operational and cash-generative, (b) a buyer universe of yield investors exists, (c) the seller wants to recycle capital, and (d) the tax saving from the shareholder-loan structure is material. It tends to lose when the business needs heavy reinvestment, has volatile cash flows, or is still in construction.
Key takeaways
- Same asset, different wrapper: the InvIT wrapper reduces tax leakage and commits to paying out cash.
- The price of that is less flexibility and more regulation.
- Developers build in companies, then sell finished assets to InvITs.
Sources
- SEBI InvIT Regulations, 2014: https://www.sebi.gov.in/sebi_data/docfiles/29273_t.html
- Income Tax Department, section 115UA (1961 Act): https://incometaxindia.gov.in/w/section-115ua-8
- CARE Ratings InvIT methodology (Dec 2022): linked above
- Shardul Amarchand Mangaldas client alert (Sep 2023): linked above
Previous: Part 1: What is an InvIT? · Next: Part 3: SEBI rules explained
Education only. This page is not investment, tax, legal or accounting advice, and it does not recommend buying, selling or holding any security. Laws and rules change: check the linked primary source and consult a qualified professional before acting.
Last reviewed 25 October 2026. Spotted an error? Tell us and we will correct it.