Renting of immovable property

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CA Sudha S Keswani (Querist)
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26 February 2013 Dear experts, If a company is earning income from renting of immovable property and in between tenant vacant the property. hence the security deposit that was given by tenant was retained by owner as per cancellation deed. is the security deposited retained as compensation is taxable as service tax? both before ammendment and after amendment?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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26 February 2013 i) If the security amount is forfeited to adjust towards arrears of rent, then ST is leviable on the forfeited security deposit.

ii) If the security amount is forfeited as compensation for damages caused to the building,then such compensation would not form part of the value of taxable service since the damage caused by the tenant is not relatable to provision of service of renting of the office building and hence ST can't be imposed.

CA Sudha S Keswani

CA Sudha S Keswani (Querist)
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27 February 2013 as per cancellation deed, security deposit is retained as compensation for vacant of premises before time period. in that case whether ST is applicable? both before and after amendment of 2012? and if taxable or not as per which section or rule?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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21 July 2025 Great question! Let me clarify the service tax treatment of security deposit retained as compensation for premature vacancy of rented immovable property, both before and after the 2012 amendment.

1. Background
Renting of immovable property is a taxable service under Section 65(105)(zzzz) of the Finance Act (Service Tax Law).

The taxable value includes rent received or receivable for the property.

2. Security Deposit Retained as Compensation — Taxability
Before 2012 Amendment:
Service tax law was less explicit about such cases.

Generally, if the security deposit was forfeited to adjust unpaid rent, it was treated as part of rent and thus taxable.

If the deposit was forfeited as compensation (penalty) for breach or premature vacation, it was debated but often not considered taxable since it’s a compensation, not rent for service of letting out property.

After 2012 Amendment (w.e.f. 01.07.2012):
The Finance Act, 2012 amendment inserted a proviso in the service tax valuation rules stating:

"Any amount received by way of compensation or penalty for breach of contract or for premature termination or for cancellation of contract shall be considered as consideration for the taxable service."

This means compensation or penalty received for premature vacation or cancellation is taxable under service tax.

3. Your Case: Security Deposit retained as compensation for premature vacation
According to the cancellation deed, the security deposit is retained as compensation for vacating before the agreed period.

Hence, after 01 July 2012, service tax is applicable on this amount because it is compensation related to breach/premature termination.

Before 01 July 2012, it may not have been taxable, but the position was not very clear and could vary based on facts.

4. Relevant Sections/Rules
Section 65(105)(zzzz) — Definition of renting of immovable property service.

Valuation Rules (Rule 2A of Service Tax Valuation Rules, 2006) — after amendment, include compensation/penalty as taxable consideration.

Circulars issued post amendment also clarify this interpretation.

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