Interest received through compensation is taxable

Supertech's buyers who have opted for refund with interest may have to pay tax on the interest

The Supreme Court has come to the rescue of those who had bought flats in Supertech’s controversial towers in Noida, providing them refunds, with compounded interest of 14 per cent. But those opting for this have to pay tax on the interest they receive. Sanjeev Gokhale, a Mumbai-based chartered accountant, says usually, compensation doesn’t attract tax because it is only ‘capital receipt’. But ‘interest’ will attract tax, as it makes good the loss a person incurs. “Usually, while drawing such agreements, the advice is to avoid the word interest and merely say compensation will be paid in case of delay in fulfilling the agreement. But in this case, since the Supreme Court order uses the word ‘interest’, it is likely home buyers will be liable to pay tax on the interest amount. The original amount paid for the flat will not be liable for tax,” he says.

The builder will deduct tax at source (TDS) at 10 per cent, but if a home buyer is in a higher tax bracket, he or she will have to show the interest payment received under other income and pay tax according to the tax slab.

Last week, the Supreme Court directed Supertech to refund the money to those who had booked flats in the Apex and Ceyane Towers and now wanted to opt out of the project. A petition was filed against the real estate firm, saying it had changed the plan of the building from 11 floors to 40 floors without the necessary permission and this would affect the safety of other residents. The court ruled the buildings should be demolished and ordered the builder to refund the money to those who had booked flats. Buyers had paid Rs 70-90 lakh as principal amount. The court also ordered the builder to pay 14 per cent compoundable interest on the amount paid by the home buyers, from 2009 (when work on the two towers began). The two towers had a total of 857 apartments, of which 600 were sold. Of the 600 buyers, 53 have opted for refunds, with the remaining agreeing to the builder’s offer of an alternative flat.

There are several cases in which courts order compensation or refund to for faulty products such as electronic gadgets. But in such cases, it is compensation for a product that isn’t working and, therefore, is capital receipt.

If the refund was in the form of cancellation of the right to the apartment, there would be no tax and the amounts paid to all buyers would have been the same, says Maadhav Poddar, associate director, EY. “But in this case, the amount paid to home buyers will be different because it will depend on how much each buyer had paid for the flat. Even if a refund was merely returning the original amount, there would be no tax, which is also not the case here.” As it is a refund, it doesn’t come under capital gains tax, but will be added to other income and taxed accordingly, he adds.