Interest On Refunds From Builders Adding To Tax Burden

Recently, several high courts and also the Supreme Court have come forward to save the investors who have booked flats in projects which were delayed for years with not even a single ray of hope to get their flats in a ready condition. Prior to coming into force of The Real Estate Regulatory Authority Act (RERA), several builders have refunded the down-payments plus interest on refunds to the buyers. But, this adds to a tax burden as home buyers will have to pay tax on this interest on refunds.

Rajeev booked a flat in a project in Chandigarh. After a delay of around 6 years, the builders recently refunded his deposit aggregating to Rs.1crore  and paid simple interest on refunds at 12%. Here, the income tax liability in his hands on the interest component at 30% is an added sting. Adding to this, the builders will be able to claim this interest payout as a business deduction and reduce his taxable profits.

The tax consequences under various circumstances are as under-

Negotiated settlement with builder

A ‘transfer’ of a capital asset results in a capital gain. The definition of ‘transfer’ in section 2(47) of the Income Tax Act is wide. It includes merely not sale, exchange, relinquishment, etc. but also covers any transaction involving the allowing of the possession of any immovable property to be taken or retained in part-performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act. At the time of booking, the buyer acquires a right in the ownership of the flat. When he settles with the builder he is extinguishing this right. Thus, the amount paid to him is characterized as sale proceeds of the capital asset.

Interest paid in cases of dispute

RERA requires the builders to pay interest at 2% above SBI’s marginal lending rate, which currently works out to 10.15% in the interest of buyers to protect them.

Such interest will be part of taxable income and income tax at the applicable slab rate. For example, 30% plus applicable cess and surcharge will have to be paid.

Loss of tax benefit on investments in a new house

Several provisions of the Income Tax Act gives tax benefit when LTCG arising on sale of asset are invested in acquiring a new house. The tax benefits have not been denied where there is delay in possession of the new house beyond two years from sale of the original asset.