Impact of Income Tax & Redevelopment

1. Sudhir Vaidya Redevelopment & Taxation
18) Redevelopment & Taxation
Sr. No. Section
1.0 Additional Area offered by the Developer:
1.1 If the new flat is acquired by the owner within a period of 3 years from
the surrender of the original flat, then the capital gain arising from the
sale – transfer of the old flat can be claimed to be exempted u/s 54 of
the IT Act,1961. Thus, Receipt of extra carpet area over and above the
existing area can be claimed as exemption u/s 54 of the IT Act, 1961.
However the original flat should have been held for over 3 years, to
qualify for the exemption.
54
1.2 If the new flat is not acquired within a period of 3 years, then the
Assessing Officer at his discretion can disallow the capital gain at any
time during the assessment. However in many cases, the deduction has
been allowed without fulfilling this condition.
1.3 If the new flat acquired to claim deduction u/s 54 is sold within a
period of 3 years from the date of purchase, then capital gain
exemption claimed earlier would become taxable in the year the new
flat is transferred.
2.0 Surrender of Flat Area:
2.1 If the existing member is surrendering a part of existing area, then he
would be liable to pay Capital Gains Tax. The sale consideration would
be calculated as per Sec.50 C
50 C
2.2 If the existing member is surrendering a part of the additional area,
then he would not be liable to pay Capital Gains Tax.
3.0 Consideration received by the society:
3.1 If the society is receiving money for the amenities and facilities for the
common use of the members & their families, the same is not taxable in
the hands of the society or the individual members as there is no cost of
acquisition of the same.

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4.0 Corpus Money:
4.1 Corpus money received by Members:
If the individual member is receiving an area which is same or more
than the present area, then he is not liable to pay capital gains tax on
the corpus money received from the developer in lieu of surrender of
part entitlement of FSI/ Development rights.
4.2 Corpus money received by Society:
If at the time of Redevelopment, the society was not in the possession
of unutilized FSI / Development Rights, and then the society would
not be liable to pay capital gains tax on the receipt of corpus money on
surrender of part entitlement of FSI/ Development rights.
If at the time of Redevelopment, the society was in the possession of
unutilized FSI / Development Rights, and then the society would be
liable to pay capital gains tax on the receipt of corpus money on
surrender of part entitlement of FSI/ Development rights.
Interest received by the society on investing corpus fund would not be
taxable if the interest is received from the co-operative banks.
Otherwise, the same is taxable.
5.0 Rent for Temporary Alternate Accommodation:
5.1 If the actual rent paid for alternate accommodation is less than the rent
allowance paid by the developer, then the excess of such amount
would be taxable under the head Income from Other sources.
5.2 Members agreeing to be temporarily relocated during the
redevelopment may receive ‘compensation for the inconvenience’ from
the developer. The same is not taxable.
6.0 Hardship Allowance:
Members opting not to be temporarily relocated during the
redevelopment may receive ‘Hardship allowance’ from the developer.
The same is not taxable.

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7.0 Household Amenities received by members from Developer:
7.1 Household amenities which are attached to the flat i.e. Fixtures,
modular kitchen, centralized AC etc. are treated as part of the Flat and
hence are exempt and not taxable in the hands of members.
7.2 Other Moveable items such as TV, Refrigerator, Washing machine, sofa
set, chairs & other items which are not attached to the walls of the flat
and exceeds Rs.50,000/- in value in totality are taxable in the hands of
the individual members in the year of receipt of these amenities u/s 56
(2) (vii) of IT Act, 1961.
56 (2) (vii)
8.0 Reimbursement of Expenses from Developer:
8.1 Anything that is reimbursed (meeting expenses, professional fees,
stamp duty, press advertisement etc.) by the developer is not taxable in
the hands of the members / society.
8.2 If excess amount is reimbursed, then the same is taxable. However if
the excess amount is spent by the society for the welfare of the
members, then the same would not be taxed.
9.0 Liquidation & Disbursement of Existing Sinking fund:
9.1 Sinking fund is meant for carrying out heavy repairs to the property.
However if the Registrar gives the permission, then the sinking fund
could be distributed amongst the members, subject to any condition
laid down by Registrar.
9.2 The principal amount of sinking fund received by the member would
not be taxable. However interest received on investment of sinking
fund would be taxable.
10.0 TDS on Receipt:
10.1 No TDS is to be deducted on the amount reimbursed by the Developer
to the society or members on corpus funds, rent, deposits, hardship
allowance, compensation for the inconvenience, shifting allowance etc.

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11.0 Tax Planning:
11.1 Whether there would be any capital gain tax liability arising on account
of such transactions of Redevelopment is not free from litigation, in
view of the fact that various litigations are pending in various courts
and the said issue would be finally settled when the Supreme Court
decides the matter.
11.2 It is also to be noted that Supreme Court changes the view from time to
time depending on frequent amendments in Income Tax Act.
11.3 It is suggested that in order to avoid the taxation problem cropping up
in future, society or the members should invest corpus fund received in
specified bonds to claim exemption u/s 54 EC of IT Act,1961. Such
investment has lock in period of 3 years. These bonds would also offer
interest on investment, which would be taxable. However such
investment in specified bonds can’t exceed Rs. 50 Lacs in a financial
year.
54 EC
11.4 Alternatively a Member can pay Long Term Capital Gains Tax @ 20%
of Corpus Fund and purchase the peace of Mind.
12.0 Disclaimer:
12.1 This compilation has been prepared to create awareness about the various tax issues
that may arise on Redevelopment.
12.2 I have made every effort to give accurate and useful information in the Article.
However I do not accept any responsibility for the accuracy or completeness of any
material contained in this article and recommend that readers should exercise their
own care and judgment with respect to its use. You can choose to act upon the
information contained in the Article at your own risk. This Article is purely
educative.
12.3 I have no intention of giving any professional Income tax advice in this Article.
Services of a competent Tax professional should be sought.