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Tax queries: How will the refund I receive for delayed delivery of property be treated for tax purposes?

Every week, an expert selected by ET answers queries from our readers on income tax.

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Last Updated: Jan 22, 2020, 11.31 AM IST
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Dilip Lakhani, Senior Chartered Accountant, answers queries from our readers.

I have booked an under-construction flat with my wife and son as joint holders. My wife is a homemaker while my son is employed. Due to a delay in the construction, I am moving RERA in Mumbai for refund. I am certain to get (a) refund of the full amount paid (b) interest on delay (c) probably some compensation. I’m considering the following options on the use of the amount I receive. Option 1: Invest the entire sum jointly with my wife in another under-construction apartment offered by a good developer; option 2: buy a ready-to-move-in apartment in either in all 3 names or jointly with my wife; option 3: deposit with a bank. We have paid nearly Rs 1 crore. My wife had contributed Rs 8-9 lakh while my son (who was then a student) has contributed Rs 3-4 lakh. Suppose, we receive Rs 40 lakh as interest and Rs 5 lakh as compensation, how will the interest amount be treated in each of our hands under the 3 options. If there is a settled case law, please let me know. Also, quote the section of tax law which is applicable - KRISHNAN

Refund of amount paid by you and your family members while booking the flat will not be treated as income and there will not be any tax implications. As regards the interest to be received, it will be subject to tax under the head ‘income from other sources’ in the hands of each family member in the proportion of the contribution made by them. Compensation to be received by you and your family members over and above the booking amount paid will be taxable depending upon the exact terms and condition and the language of the document under which the said amount will be received. You cannot claim any benefit on utilisation of such funds while computing your taxable income.

Here’s my query with regards to Tax exemption on HRA: Till July 31, 2019, I was posted in Mumbai and from August 1, 2019, I was transferred to a sister company in Delhi. Till July 31, 2019, I was getting HRA benefit for my rented accommodation in Mumbai. Since my son is studying in Mumbai, I have retained my rented accommodation in Mumbai even after moving to Delhi. According to the accounts department of my Delhi company, I wouldn’t get HRA benefit for the Mumbai rented accommodation since for availing HRA benefit the rented accommodation should be in the city of posting. Does the IT rule disallow HRA benefits if the rented accommodation is located in a city different from the city of employment/posting? Any supporting proof? (PS: Proof of rent payment PAN no. of landlord, rent receipt, account statement are available with me) - NK PANDEY

As per Section 10(13A) of the I-T Act 1961, any special allowance i.e. House Rent Allowance (HRA) granted to an assessee by an employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by him, is exempt from tax. For the purpose of availing the benefit of the said exemption, you should be paying rent for a residential accommodation and it should be occupied by you. The benefit of HRA is not available for rent paid with respect to a residential house that is occupied by any other person, like your parents/ children. Your employer at Delhi has within the provision of law denied the HRA exemption for rented accommodation in Mumbai occupied by your son.


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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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