31 July 2024
When giving a flat on lease, the income tax treatment depends on the nature of the lease arrangement. In the scenario described, where your friend receives ₹10 lakh as a lease amount and is required to return the same amount after 5 years, the tax treatment can be understood as follows:
### **Tax Treatment of Lease Amount:**
**1. **Income Recognition:**
- **Advance Lease Payment:** Since the lease payment of ₹10 lakh is a deposit and will be refunded after 5 years, it is not treated as income at the time of receipt. Instead, it is considered as a refundable deposit.
- **Interest Income:** If the amount of ₹10 lakh is invested or earns any interest during the lease period, that interest income would be taxable as "Income from Other Sources" under Section 56 of the Income Tax Act.
**2. **Tax Implications:**
- **Principal Lease Amount:** The principal lease amount received (₹10 lakh) is not taxable as income at the time of receipt because it will be refunded after the lease period.
- **Interest Earned:** If the ₹10 lakh is kept in an interest-bearing account, the interest earned on this deposit is taxable. This interest should be reported as income under "Income from Other Sources" in the Income Tax Return.
**3. **Tax Filing:**
- **Interest Income:** Report the interest earned on the deposit in the year it is received. The interest income will be taxed as per the applicable tax slab rates.
### **Tax Sections Applicable:**
- **Section 56:** For taxing interest income earned on the refundable deposit. - **Section 28:** This section pertains to income from business or profession, but in the case of residential property leased out, it is not directly applicable.
### **Summary:**
1. **Lease Amount:** ₹10 lakh received as a refundable deposit is not taxable at the time of receipt. 2. **Interest Income:** Any interest earned on the ₹10 lakh during the lease period is taxable and should be reported under "Income from Other Sources."
### **Action Steps:**
1. **Track Interest Income:** Keep track of the interest earned on the lease amount and include it in your income tax return under "Income from Other Sources." 2. **File Income Tax Return:** Report the interest income as per the applicable tax slab rates.
For detailed calculations and personalized advice, consulting a tax professional is recommended to ensure compliance with the latest tax regulations and accurate filing.
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