Interest on refunds from builders adds to tax burden for homebuyers


Buyers of residential properties who have received their payments back from the builders because the projects got shelved due to one reason or another, now find that they have to pay tax on the interest component of this money, adding to their tax burden. 


Those having a taxable income of Rs 10 lakh or more fall in the highest tax slab, where the tax rate is 30% plus applicable cess and surcharge—the highest tax rate is 35.53%. Many buyers, especially in metros, who book flats in upper-middle and high-end real estate projects, tend to fall in the 30% tax bracket.


In the recent past there have been numerous instances where the Supreme Court and several high courts have come to the rescue of investors who have booked flats in projects that seem to be going nowhere, with no sign of completion in sight. Additionally, several errant builders, prior to coming into force of The Real Estate Regulatory Authority Act (RERA), have refunded the down payments plus interest to the buyers.


These buyers may have got back their initial investment and also interest as a compensation but they aren’t uncorking the bubbly. “A few friends and I had booked flats in a prominent project in Mumbai. After a delay of nearly six years, the builder recently refunded my deposit aggregating to Rs 1 cr and paid simple interest at 12%. The interest payout is not in tandem with the capital appreciation the flat we would have obtained. Lastly, the IT liability in my hands on the interest component at 30% is an added sting. To add insult to injury, the errant builder will be able to claim this interest payout as a business deduction and reduce his taxable profits,” says a buyer.


“Under a negotiated settlement with the builder, it may be possible to characterise the sums received as a ‘capital gain’ with a lower tax rate of 20% and other benefits,” says Anil Harish, an advocate specialising in real estate.  So, the outgo can be checked by taking some professional help.

Written by The Realty Paper

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