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Income tax on rent on heavy deposit

shibsankar (Asst. Manager - Accountants) (119 Points)

22 December 2014

Hi Everyone,

I have a query , one of my friend rented his house on heavy deposit. I
wanted to know what would be the income tax treatment for that.

For example let us assume that he has given his house on rent on heavy
deposit of Rs.10 Lacs and paid the home loan subsequently.

Does he has to consider this Rs.10 Lacs as an income?.If Yes then under which income head it should be shown and if No then under which section it should shown as exemted.

Because he has to return the amount once the agreement expires.

Thank you so much in advance.

Will be waiting for you reply.

Thanks & Regards
Shib

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7 Replies

CA Raj Doshi (Practising CA) (8723 Points)
Replied 22 December 2014

Deposit whatsoever amount is not income provided there is legal evidence that it is a deposit. The rent agreement should mention that deposit to the tune of rs.10 lacs has been accepted on a refundable basis. Or Certificate from tenant that it is a deposit for taking premises on rent. Housing loan principal repayment drdcuted up to Rs.200000 from a.y 15-16. It is advisable not to pay more than that. So that tax benefit is spread through the years. Also, ensure enough funds to repay the deposit otherwise you will be.facing liquidity crunch

1 Like

Z ( ) (2960 Points)
Replied 23 December 2014

If someone pays such high sum as security then the rent is also charged low, we need to read the agreement and also estimate the fair rent in that area. We also need to see that whether any accretions ,if any, from this money is given to the tenant or not.

If the rent has not been decreased and the accretions,if any, are also paid to the tenant then there will be no change , otherwise the rent value will be increased for tax purpose

[Its from several case laws]

1 Like

Arif Ali (Apt Co Advisory) (1230 Points)
Replied 23 December 2014

Since it is security deposit received by your friend. and it is refundable to tenant at the expiry of rent period. then it is not income.

nothing tax treatment will be there.

However if this is adjusted for rent, then it will be deemd as rent income in the year od adjustment. and accordingly rent income will be calculated under law.

Further your friend is paying the loan repayment, then accordingly he will be eligible to claim the deduction under section 80C for principal amount and under section 24 b for interest portion.

1 Like

shibsankar (Asst. Manager - Accountants) (119 Points)
Replied 23 December 2014

Thank you everyone for the clarity....

Hello Mr.Arif, the amount received as heavy deposit will not adjusted as rent.

The amount will be refunded to the tenant.

One thing i forgot to mention, the tenant pays Rs.1000 per month as maintenance charges to the owner.

Does he consider this Rs.1000/- as income?

Thanks

Z ( ) (2960 Points)
Replied 23 December 2014

[Adding a case]

[As a courtesy am abstaining from replying to the question which was specifically asked from Arif Ali Sir]

For inclusion we would have to examine as to what was the purpose for making such deposit? Its ubiquitous that security deposit is taken from tenant to ensure that tenant will not mis-use or damage the property.,comply with ToC of the agreement , Payment on timely basis and most importantly as a compensation short payment or non-payment of rent. In CIT V K.Streetlite ElectricCorp 2011 , it was held that if the purpose of the security deposit is to compensiate the short payment or non payment of the rent then notional interest should be added in rent received/receivable

[There are few more cases]

shivaji .b.thakur (asstt.auditor) (26 Points)
Replied 23 December 2014

thank you expert team all of sir for guidelines of my question arrise salute to team

Supreet Hegde (2 Points)
Replied 05 June 2019

Hi Let me amplify the issue of huge deposit. For example in Bangalore there is practice of longterm lease (3 years) with refundable deposit of huge amount (this amount is determined by Market rental rates and risk free interest rates). The tenant will not pay any rent for the period of lease other than maintenance fees to the society. the land lord may use the amount to invest in any assets, say FD, shares, mutual funds or repay the loan. The information I got from my CA is, the landlord will have treat it as rental income based on higher of following:

(a) Risk free interest rate yield on the deposit

(b) Actual income from investments

Kindly provide your valuable comments