Taxability of court order in case of real estate property

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Haresh Dua (Querist)
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14 August 2025 I had booked an under construction flat approx. 5 years back. I got allotment letter from the builder and made various payment (approx. 50% of the flat value) on various dates against demand notes raised by the builder. However, a dispute created by the builder when I asked for the agreement for sale. He increased the price which I refused to pay. I filed case in consumer court as builder has neither refunded the money nor signed Agreement of Sale. After 4 years of legal battle, court ordered the builder to refund the money with interest. Now, I got the money with interest.

I like to know whether interest given by builder is taxed under Income from other sources or Long Term capital gain from house property (as I had originally booked the flat for own residence)

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)
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14 August 2025 Taxability of Interest Received on Refund from Builder:
1. Interest Amount:
The interest you received on the refund amount from the builder is treated as Income from Other Sources under the Income Tax Act.
It is not considered as Capital Gains, because the interest is compensation for the delayed refund and not proceeds from the sale or transfer of capital asset.
2. Why not Capital Gains?
Capital Gains arise from transfer (sale, exchange, etc.) of a capital asset.
In your case, since the sale agreement was never executed (builder never signed the agreement), the transaction of property transfer did not happen.
The amount refunded is the principal amount you paid, and the interest is compensation for the delay.
3. Implication:
Interest is taxable as Income from Other Sources at your applicable slab rates.
The principal refund amount itself is not taxable since it's your original money being returned.

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