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Rent received from developer is taxable – ANISH B MEHTA Member, ICAI, He can be reached at anish.mehta at haribhaktigroup,com
Hindustan Times Mumbai – September 27, 2007
Swadesh Sachdev: My co-operative housing society plans to go for redevelopment as the building is old and needs to be repaired often. The developer is offering an extra bedroom, about 200 square feet, a corpus fund to the residents and two years rent as they will be staying on rent till the building is ready for occupation. The query is whether we need to pay income tax on,the corpus money we receive and the rent given for staying till the building is redeveloped? Will we be required to pay income tax/capital gain tax if it arises on account of the building providing addition room and if yes, how it is to be worked out? How can the taxes be avoided? Are there any schemes or provisions on this in the income-Tax Act?
Our reply is based on the understanding of the limited available facts. Generally, the corpus fund is paid for a specific purpose. The corpus fund is being paid by the developer for the inconvenience caused to you. Hence, on the basis of the decision of the Bombay Tribunal in the case of Lohtse Co-operative Housing Society Ltd vs Seventh Income-tax Officer reported at 51-ITD-608, you can contend that the said corpus fund received by you is in the nature of capital receipt. The two years rent receivable-from the developer will be taxable under the head “income from other sources”. Against the said rent receipt, you can claim deduction for actual rent paid under the provisions of Section 57(iii) of the Income-Tax Act, as an expenditure incurred wholly and exclusively for earning the said income. Under the redevelopment scheme, you would be handing over the possession of the existing flat to the developer for the limited purpose of redevelopment. Thus, there is no transfer of any asset. The date on which the new flat is registered in your name, you would be the owner of the extra 200 square feet area allotted to you, for which the cost would be nil. Capital gain will arise on the sale of new flat. The difference between the amount of sale consideration received by you and the indexed cost of acquisition of the original flat as reduced by expenditure, if any, incurred for transfer of new flat will be your capital gain. If you invest the capital gain on sale of the new flat by purchasing another residential house, then the entire capital gain will not be charged to income tax.
What will be the Income Tax treatment of the rent, corpus fund (hardship compensation) and shifting charges paid to a society member by the builder during redevelopment? -K G Kutty – DNA – 21 May 2011
As per the many latest judgments given by the Income Tax Tribunal, Mumbai, the corpus fund/ Hardship compensation is not taxable as there is no cost of acquisition. In case of rent received during the temporary accommodation, if the entire rent compensation received is for alternative accommodation, the same is not taxable. In case, no rent is paid or if any amount is saved from the rental part, the same is taxable under income from other sources. Shifting charges will not be taxable as the same will be naturally spent by the member to shift the belongings to the new place.
– Ramesh S Prabhu – Chairman, Maharashtra Societies Welfare Association.
Consumer Resources 
A very good solution to the problem at hand.
With tax compliance getting more vigilant the rent paid by developer to the members of the society should deduct TDS and then when the member pays rent for alternative arrangement during the time the building is under redevelopment should deduct the TDS. And pay income tax on rent received from developer and rent paid for alternative accomodation.
The play of word for corpus distribution as hardship allowance is ticky and liable to tax payment. As hadrship can be accepted by just agreement wording. There has to be hardship visibly apparent. One can not escape payment of tax when being enriched by the use of word hardship just play of words is risky. In the past it has gone through without tax but with redevelopment mushrooming like anything the government can not fore go tax. At the same time the developer will deduct paid as hardship amount as his expense so both payer and receiver are escaping payment of tax. This is silly.