SM REITs explained: SEBI's Rs 50 crore small-cap cousin of listed REITs and how its scheme structure works

India's listed real-estate trust market has a hard floor of Rs 500 crore. SEBI's REIT Regulations require the value of assets under an existing REIT to be at least rupees 500 crore, and that single threshold kept the format out of reach for the mid-sized office block, the single Grade-A floor plate and the standalone business park. On 8 March 2024 the Securities and Exchange Board of India notified the SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 and built a second tier beneath that floor: the Small and Medium REIT, or SM REIT.

An SM REIT scheme holds property worth at least Rs 50 crore and less than Rs 500 crore, one-tenth the entry size of a conventional REIT at the bottom end. The amendment also pulled fractional-ownership real-estate platforms, which had been selling slices of commercial buildings through privately arranged special purpose vehicles, inside a formal regulatory perimeter for the first time.

The two products share a name and little else about how they are built. A listed REIT is one pool; an SM REIT is a series of ring-fenced schemes. That difference drives the minimum cheque, the diversification and the risk you are actually taking.

What SEBI Notified on 8 March 2024

The SM REIT rules sit in Chapter VIB of the REIT Regulations. SEBI's own Frequently Asked Questions on the Framework for Small and Medium REITs, issued on 18 June 2024, is the clearest official description of how the machinery works, and the figures below come from it.

The headline number is the asset band. Regulation 26P(2)(a) states that no offer of units by a scheme may be made unless the size of the asset proposed to be acquired is at least rupees fifty crore and less than rupees five hundred crore. Regulation 26P(2)(b) adds a second gate: the scheme needs at least 200 unitholders, counted excluding the investment manager, its related parties and the associates of the SM REIT.

The second defining number is the unit price. SEBI fixed the minimum price of each unit of an SM REIT scheme at rupees ten lakh. There is no equivalent in the listed REIT market, where the trading lot is a single unit and the minimum subscription in an initial offer runs at Rs 10,000 to Rs 15,000, per SEBI's Frequently Asked Questions for Real Estate Investment Trusts. An SM REIT is a listed instrument with a private-market entry ticket.

The third is the investment condition. A scheme must put at least 95 per cent of the value of its assets into completed and revenue-generating property, with up to 5 per cent in liquid assets that must be unencumbered. Under-construction property, non-revenue-generating property and vacant land cannot be held under an SM REIT at all.

Side-by-Side Comparison

The table below sets the two structures against each other on the parameters that change an investor's actual experience. Every figure is from the two SEBI FAQ documents cited above.

Two rows deserve emphasis. The Rs 10 lakh minimum unit price is roughly 67 times the top of the Rs 10,000 to Rs 15,000 subscription band for a listed REIT, which is why these are different products for different balance sheets even though both trade on the same exchanges. And the ban on related-party transactions is absolute: SEBI has stated that a developer acting as investment manager cannot transfer its own assets into the SM REIT it manages.

How the Scheme Structure Works

The scheme is the unit of account in an SM REIT, and this is the part most readily misunderstood. SEBI describes the arrangement as similar to the distinct schemes in a mutual fund: a single SM REIT can launch several schemes, and each scheme has its own set of unitholders with beneficial interest only in that scheme's assets.

Ring-fencing is mandatory. The regulations require the assets of each scheme, its bank accounts, its investment or demat accounts and its books of accounts to be segregated from every other scheme under the same trust. In a conventional REIT, by contrast, every new asset is added to the same pool and all unitholders hold beneficial interest in the entire pool.

Below the scheme sits the SPV. Regulation 26H(f) defines it as a company that is a wholly owned subsidiary of the scheme, with no other capital or ownership interest in it. SEBI has clarified three consequences: there is no limit on the number of SPVs inside one scheme, each SPV must directly and solely own all assets under it, and multiple SPVs cannot jointly own a single property.

Because the Rs 500 crore ceiling applies per scheme rather than per trust, SEBI has confirmed that a single SM REIT running three schemes of Rs 450 crore each, totalling Rs 1,350 crore, is permitted. There is no cap on the collective value of assets held across all schemes. Two guardrails apply at trust level: the SM REIT's trademark, brand name and website must be used exclusively for SM REIT activity, and a scheme with no assets remaining for more than six months must be put forward for delisting.

The 95 Per Cent Rule and What It Excludes

The 95 per cent completed-and-revenue-generating test is the investor-protection core of the framework, and it narrows the asset universe sharply. SEBI states the purpose plainly: the condition exists to ensure a stable income stream for unitholders, and the regulator declined to prescribe any minimum cap rate or net rental yield in its place.

Residential property is eligible. SEBI has confirmed that the REIT Regulations do not differentiate between commercial and residential property, so any asset meeting the definition of real estate under Regulation 2(1)(zi) can be held, provided it is completed and revenue generating.

Infrastructure is not. A warehousing facility with a minimum area of 1 lakh square feet and minimum investment of Rs 25 crore is classified as infrastructure, and SEBI has confirmed an SM REIT cannot invest in such an asset. The exception is common infrastructure forming part of composite real-estate projects, industrial parks and special economic zones, which remains permitted.

Tax Treatment

Both a listed REIT and an SM REIT scheme issue units of a business trust, and both are mandatorily listed, so the capital-gains architecture is the same. What differs is the size of the position you are forced to take, and that changes how the exemption behaves in practice.

Distributions are governed by the pass-through regime in Section 115UA of the Income-tax Act, 1961. Income distributed by a business trust is not taxed at the trust level and instead retains its character in the hands of the unitholder, so a single payout can carry interest, dividend, rental and return-of-capital components taxed differently from one another. Every distribution statement should be read component by component rather than as one number.

On the capital-gains side, Budget 2024 reset the rates with effect from 23 July 2024. Long-term gains on listed units on which securities transaction tax has been paid are taxed at 12.5 per cent under Section 112A, above an annual exemption of Rs 1,25,000. Short-term gains are taxed at 20 per cent under Section 111A, raised from the earlier 15 per cent. Health and education cess of 4 per cent applies on top of tax and surcharge in both cases.

The practical asymmetry sits in that Rs 1,25,000 exemption. A listed REIT investor can hold a Rs 40,000 position and trim it in slices, keeping realised gains inside the annual exemption for years. An SM REIT holder whose smallest possible position is one Rs 10 lakh unit cannot part-exit below the unit, so a single disposal is far more likely to produce a gain above Rs 1,25,000 in one financial year. The gross yield side of either holding can be modelled with our real-estate ROI calculator, and the two heads are defined in our glossary entries on LTCG and STCG.

Who Should Pick Which

This section describes which structure fits which set of constraints. It is not investment advice and not a recommendation to buy, sell or subscribe to any trust, scheme or platform.

The Rs 10 lakh minimum unit price does most of the sorting on its own. For a portfolio of Rs 20 lakh, a single SM REIT unit is 50 per cent of the whole, concentrated in the assets of one scheme that may legitimately hold as little as Rs 50 crore of property. That is a concentration profile closer to buying a commercial floor outright than to owning a diversified listed trust.

For the investor who wants rent-linked exposure in small increments, the listed REIT is the structure the rules were written for. A trading lot of one unit and an initial-offer band of Rs 10,000 to Rs 15,000 let the position be sized to the portfolio rather than the other way round, and distribution of at least 90 per cent of net distributable cash flows applies across a single pooled asset base. SEBI's REIT FAQ records the minimum distribution frequency as once every six months; the current operative detail sits in the Master Circular for REITs.

For investors already holding fractional commercial property through a platform SPV, the question is migration rather than selection. SEBI exempted migrating structures from the asset-size and minimum-unitholder requirements of Regulation 26P(2), provided the applicant filed for registration within six months of 8 March 2024 and completes migration within six months of registration. Holdings must be aligned into multiples of Rs 10 lakh first, since the regulations contain no mechanism for odd-value securities.

For everyone, the diligence list is short because the disclosures are prescribed. The draft scheme offer document must be hosted publicly for a minimum of 21 days for comments, and the total expense ratio, covering management, advisory, trustee and audit fees, must be disclosed in it. Since SEBI has set no cap on investment manager fees and no minimum cap rate, that document is where the economics of a scheme are decided. A property holding can be compared against a market-linked alternative using our SIP calculator and lumpsum calculator.

FAQ

What is the minimum investment in an SM REIT?

Rs 10 lakh. SEBI has fixed the minimum price of each unit of a scheme of an SM REIT at rupees ten lakh, and units are issued in multiples of that amount. A listed REIT has a trading lot of one unit and an initial-offer subscription band of Rs 10,000 to Rs 15,000.

How is an SM REIT different from a regular REIT?

Three ways. The asset band is Rs 50 crore to under Rs 500 crore against at least Rs 500 crore for a REIT. The SM REIT is scheme-based, with each scheme ring-fenced and separately owned, while a REIT is a single pool. And an SM REIT is barred from related-party transactions altogether.

Can an SM REIT hold under-construction property?

No. SEBI has confirmed that properties which are not completed or are non-revenue-generating cannot be held under an SM REIT, and vacant land is excluded as well. At least 95 per cent of scheme asset value must be in completed and revenue-generating property.

How are SM REIT distributions and gains taxed?

Distributions pass through under Section 115UA of the Income-tax Act, 1961 and retain their character, so interest, dividend, rental and return-of-capital components are taxed separately. On listed units with securities transaction tax paid, long-term gains are taxed at 12.5 per cent above an annual exemption of Rs 1,25,000 and short-term gains at 20 per cent, both effective from 23 July 2024, plus 4 per cent cess.

Can a real estate developer launch its own SM REIT?

A developer can act as investment manager if it meets the eligibility conditions in Regulation 26J(2)(d), but SEBI has confirmed it cannot then transfer its own assets into that SM REIT, because the framework does not permit related-party transactions. The investment manager must be a company incorporated in India.

How many schemes can one SM REIT run?

There is no cap. Because the Rs 500 crore ceiling applies per scheme, SEBI has confirmed that three schemes of Rs 450 crore each, totalling Rs 1,350 crore under one SM REIT, is permitted. Assets, bank accounts, demat accounts and books must be segregated scheme by scheme.

This article is informational and reflects the position under the SEBI REIT Regulations as described in SEBI's published FAQs. It is not investment advice or a recommendation to subscribe to any scheme.