Typically, when a building goes in for redevelopment, the existing flat-owners are usually offered some rental compensation. It could be a lumpsum amount or monthly payout. This is to cover for the alternative accommodation during the duration of the redevelopment. How is this rental payout treated in the hands of the old tenant from tax point of view?
This would depend on how the income is first treated – revenue receipt or capital receipt?
As per Income Tax Act, all revenue receipts are taxable. Certain capital receipts (like capital gains during asset transfer) are taxable, while others (like donation, membership fees) are not.
In the case of redevelopment, the compensation is paid by the builder on account of hardship faced by the old owner due to displacement. Such compensation towards relocation is a capital receipt and not taxable.
Now, suppose, the occupant already has an alternative accommodation during the tenure of redevelopment of the old property and hence has not utilized the compensation for the intended purpose. Or the occupant had let out the old property to someone earlier before it went under redevelopment. Irrespective of the occupant staying in the old accommodation or let it out, the compensation received from the builder will be treated as capital receipt and not taxable.
There have been disputes on such cases where the assessing income tax officer have treated the compensation as income and taxed under the head ‘income from other sources. However, the Income Tax Appellate Tribunal (ITAT) after hearing the cases have ruled in favor of the occupants. While similar judgements may follow within the framework of the IT Act, in case of future disputes, they can depend on the unique nuances & merit of the case.