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Property booking refund: Can I avoid taxes on Rs. 30 Lakh?

Ramalingam Kalirajan |8319 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Dec 07, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by PADMAKUMAR on Dec 05, 2024Hindi

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Sir, I had booked a property in 2016 and made a payment of approx Rs. 27,00,000/- through savings and home loan availed. Since the property is not yet delivered, I have asked for refund and the builder is ready to make the payment of approx Rs. 30,00,000/-. This amount includes the EMI and interest payment made upto 2021 wherein I had closed the loan availed. Kindly advise as to 1) whether I will have to pay any tax? 2) whether I can transfer the amount to my spouse 3) whether I will be subjected to any Income Tax payment or otherwise

Ans: The refund you receive is considered a capital transaction. Whether it is taxable depends on specific factors. Below is a detailed analysis:

1. Taxability of Refund Received
Principal Amount Paid:
The principal amount refunded is not taxable. This is because it is your own money returned.

Interest Paid by the Builder:
Any interest or additional amount refunded is taxable. It will be considered "Income from Other Sources."

Loan EMIs Paid:
Refund of EMIs made towards loan repayment may include interest and principal components. The interest portion refunded could be taxable as per tax rules.

Cost Indexation Benefit:
Since you booked the property for investment, any capital gain or loss may apply. This depends on how the tax department views the refund transaction.

2. Possibility of Transferring the Amount to Your Spouse
Gifting to Spouse:
You can transfer the amount to your spouse without immediate tax implications. Gifts to a spouse are exempt under the Income Tax Act.

Clubbed Income Rule:
However, if your spouse invests this amount and earns income, it will be clubbed with your taxable income. You will have to pay tax on the income generated from such investments.

Using a Joint Account:
Alternatively, consider using a joint account for better transparency and tracking of funds.

Steps for Managing Tax Liability
Evaluate Refund Break-Up
Ask the builder for a detailed breakup of the refund amount.
This should include the principal amount, interest, and EMI refund details.
Tax on Interest Component
The interest portion will be taxed under "Income from Other Sources."
Include this amount while filing your income tax return (ITR).
Utilise Capital Gains Exemptions (If Applicable)
If the refund amount results in capital gains, you can reinvest in certain tax-saving bonds under Section 54EC.
Alternatively, reinvesting in another residential property could provide tax exemption under Section 54F.
Keep Documentation Ready
Maintain all records of payments made to the builder and the refund received.
This will be helpful in case of any scrutiny or queries from the Income Tax Department.
Recommendations for the Refund Amount
Do Not Invest Entirely in Fixed Deposits
Fixed deposits offer low returns, which may not beat inflation in the long term.
Consider growth-oriented investments like mutual funds for better returns.
Explore Mutual Funds for Better Returns
Invest part of the amount in diversified mutual funds for wealth creation.
Actively managed funds outperform passive options over the long term.
Consult a Certified Financial Planner to align investments with your goals.
Maintain Liquidity for Immediate Needs
Keep a portion of the refund in a liquid or short-term debt fund.
This ensures funds are readily available for short-term needs.
Final Insights
The principal portion of the refund is not taxable.
Interest and EMI refunds may attract tax under specific conditions.
Transferring the amount to your spouse is possible but involves clubbing rules.
Diversify investments into mutual funds for long-term benefits.
Maintain proper documentation to handle tax implications smoothly.
Seek personalised guidance from a Certified Financial Planner to optimise the utilisation of this refund.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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