Is compensation/interest recovered by RERA court from builder taxable?

Hi Kul K,

This is a nuanced question. Let me clarify the tax treatment of compensation/interest recovered by RERA from the builder and paid to you:

Key Points:

1. Principal Amount (₹57L):

   • This is your own money originally paid for the flat. Returning the principal is not taxable, as it’s a return of capital.

2. Interest/Compensation Amount (₹37L):

   • Interest or compensation received from the builder as ordered by RERA is generally treated as “Income from Other Sources” under the Income Tax Act.

   • It is taxable in the year of receipt at your applicable slab rate.

   • The ITAT ruling you mentioned mainly applies to cases where the buyer cancels the booking and recovers more than the amount paid. That ruling is specific and does not necessarily apply to interest/compensation recovered through RERA.

3. Capital Gains Aspect:

   • Capital gains arise only if you sell or transfer the ownership of the flat.

   • Here, if you are just recovering money due to builder's breach and not selling property, capital gains provisions do not apply.

4. Holding Period & Capital Gains:

   • The ITAT ruling states that excess amount beyond your cost (if it qualifies as capital asset sale) may or may not be taxable as LTCG/STCG depending on conditions.

   • But since this is compensation for breach/delay, it’s not a capital gains transaction.

Conclusion:

• Interest/compensation recovered from builder via RERA is taxable under “Income from Other Sources”.

• You should declare ₹37L interest as income in your ITR for the relevant year.

• The ₹57L principal is not taxable.

If you want, I can help you draft the relevant section of your ITR or suggest how to report this income properly.

Note: Always good to consult a tax professional for complex cases and confirm based on your entire facts and applicable rulings.