Treatment For Tax purpose

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This query is : Resolved

Rahul Kumar Ghatliya (Querist)

14 January 2010 An Individual having one flat.
A builder wants to reconstruct it so he tooks over the Property and pays RENT and also Rs. 10 lac in lumpsum as a compensation.
After reconstructing, the builder returned the property to the OWNER.
What will be the treatment of Rs. 10 Lac for Income Tax Purpose? Plz Reply..........

Thanks in advance

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)

14 January 2010 Difficult to say but it should be Income from Other source or will be treated as deduction from the cost of flat.. not sure please recheck and let me know.

CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)

14 January 2010 Not clear as why Rs. 10 lakh has been paid by the builder? If it is a refund by the builder, it is a capital receipt & shall be reduced from the cost of acquisition.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

02 August 2025 Here’s a clear way to look at the **treatment of Rs. 10 lakh compensation received from the builder** under Income Tax law:

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### Situation:

* Owner has a flat.
* Builder takes over flat for reconstruction.
* Builder pays rent during the period.
* Builder pays Rs. 10 lakh lumpsum as compensation.
* After reconstruction, flat is returned to the owner.

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### Tax Treatment of Rs. 10 Lakh Compensation:

1. **Capital Receipt or Income?**
This Rs. 10 lakh is a **capital receipt** because:

* It’s compensation for giving possession of the property for reconstruction.
* The ownership of the property remains with the owner.
* The flat is returned after reconstruction, so the owner has not transferred ownership permanently.

2. **Impact on Cost of Acquisition:**
The Rs. 10 lakh compensation should be treated as **reduction in the cost of acquisition** of the flat.

* That means when the owner sells the flat in the future, the purchase cost will be reduced by Rs. 10 lakh for calculating capital gains.

3. **Not Taxable as Income:**
Since this amount is compensation and not rent or income from other sources, it is **not taxable as income** immediately.

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### Summary Journal Entry (for your understanding):

* **On receiving compensation:**
Dr. Bank A/c — Rs. 10,00,000
Cr. Compensation from Builder (Capital receipt) — Rs. 10,00,000

* At the time of sale of flat, cost of acquisition will be:
Original cost of flat – Rs. 10,00,000

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### Important:

* The rent paid by the builder during possession is taxable as **Income from House Property** for the owner.
* The lumpsum compensation is capital in nature, so no immediate tax.
* If no sale happens, this Rs. 10 lakh just adjusts cost base, no tax now.

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If you want, I can help you draft a detailed tax note or calculation example on this. Would you like that?

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