Cancel of RERA Project under construction, received refund with interest: what is tax treatment?

Deepak, you're navigating a complex situation that intertwines legal and tax implications due to the cancellation of a RERA-registered project and the subsequent settlement.

1. Buyer's Rights on Project Cancellation: If the new builder cancels the project as per RERA guidelines, you are generally entitled to a refund of the amount paid along with interest. The specifics depend on the state’s RERA rules.

2. Tax Treatment of Interest Received: The interest you receive from the builder is considered "Income from Other Sources" and is taxable per your income tax slab. The TDS at 10% on the interest indicates compliance with standard tax deduction practices on such income.

3. Interest Paid as an Expense: The interest you've paid towards the flat cannot directly offset the interest income you receive due to the project cancellation. In tax terms, the interest received is taxable income without a provision to deduct the interest you've paid previously.

4. Alternative Tax Considerations: There's no straightforward alternate treatment for the compensation received. The primary focus is on the interest component, which is taxable as income. 

For detailed, personalized advice, consider a phone consultancy.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal

1. Your right for refund of principal amount and interest compensation is fully protected 

2. Under Income tax, it is an extinguishment of rights in the property taxable under the head capital gain. To qualify for LTCG (long term capital gain) in respect to extinguishment of rights, the period of holding of rights in the property should exceed 36 months on the date of transfer. You can claim benefit of exemption u/s 54F

3&4. Assuming it is an interest paid on housing loan. The purpose of interest paid is not to "make or earn" interest income therefore not allowed. Considering the contingency in your case, you can claim it but it may subject to litigation. Also you can claim only that part of interest which is not claimed under any other section of the Income tax.

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The compensation you receive from the builder, labeled as "interest" on the principal amount, might be considered compensatory rather than traditional interest. According to the case studies and legal precedents you've referenced, such compensatory payments may not be subject to TDS under Section 194A of the Income Tax Act. This is based on the interpretation that these payments are for damages due to the delay or cancellation of the project, rather than interest income.

However, the builder's decision to deduct TDS highlights the complexity of tax law interpretations in these scenarios.

For detailed, personalized advice, consider a phone consultancy.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal

- Interest in itself is a compensation amount. It is only a yardstick to calculate the amount of compensation. It does not qualify the definition u/s 2(28A) therefore no TDS should be deducted on the same

For detailed discussion you may opt for phone consultation