Income Tax for Apartment Owners Associations

Are Apartment Owners’ Associations in India liable to pay Income tax? Which income categories are taxable and which are exempt? Do they need to file tax returns every year? These are a must-know for every Association Treasurer. Here is an article compiled from reliable sources*, that wishes to be of help.
Income Tax laws and the “Concept of Mutuality”
Apartment Owners Associations are categorised as Associations of Persons (AOP) under the Income Tax Law.
The governing concept for applying income tax laws to the Association of Persons is the “Concept of Mutuality”. This concept means that the contributors to a fund and the beneficiaries of the fund – are identical. This in turn implies that there is no scope for individual profits or gains. Any surplus generated in this fund – which is income over expenditure – is held by the association for future utilization to the benefit of the contributors. Complete tax exemption is given to funds/surplus funds to which the “Concept of Mutuality” applies.
So, what is taxable and what is not?
Income NOT subject to tax:
Contribution from Members
Maintenance Charges, Electricity charges, Penalties, Interest charged on outstanding Maintenance Charges etc. – are the typical contribution by members of the Association. The association merely works as an agent that collects these charges and uses them for various common expenses. Any surplus during a fiscal year is carried forward to the next fiscal year, with no tax implications.
Interest earned from Co-operative Banks
If any investment is made in co-operative banks, the interest earned from such investment qualifies for deduction @ 100% under section 80P(d)
Dividend
If the Dividend income is received from Indian Companies, the dividend is fully exempt under section u/s 10 (34). Dividend received from Co-operative Banks qualifies for exemption under 80P(d) is therefore 100% deductible.
Rentals received from members for utilizing facilities
If common facilities such as community hall, open spaces, terrace etc., are rented out to members for a fees, the income is not taxable, thanks to “Concept of Mutuality”
Income subject to tax:
Interest earned on Investments in banks other than co-operative banks.
Any interest earned from banks which are not co-operative banks
Rental Income from Advertisement Hoardings
This is fully taxable under the head Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis. Here the payer is responsible to deduct TDS from the payments made to the association.
Rental from Mobile / Cable Towers etc
Rental from mobile & Cable Towers is taxable under the head Income from House Property; considering the same it is eligible for standard deduction u/s 24 (a) @ 30 % of the rent. Also if the association has taken loan to build the tower structure, a proportionate deduction can be claimed for interest paid on borrowed capital.
Rentals from use of open Spaces / Terrace – received from non members
“Concept of Mutuality” does not apply to this Rental and it is fully taxable under the head Income from House Property & may qualify for deductions mentioned in point 3 above.
To conclude, it is a must for associations to get PAN registered in the name of the association and file Income Tax Returns regularly. Even if an association does not have taxable income due to deduction available (e.g., investments only in co-operative banks), it is necessary for the society to prove this, which is possible only with a Income Tax return filing.
Sources: Our thanks to CAclubindia, The Hindu andeleminds.

TaxesAre Apartment Owners Associations in India liable to pay Income Tax? Which income categories are taxable and which are exempt? Do they need to file tax returns every year? These are a must-know for every Association Treasurer. Here is an article compiled from various sources*, that wishes to be of help.

Income Tax laws and the “Concept of Mutuality”

Apartment Owners Associations are categorised as Associations of Persons (AOP) under the Income Tax Law.

The governing concept for applying income tax laws to the Association of Persons is the “Concept of Mutuality”. This concept means that the contributors to a fund and the beneficiaries of the fund – are identical. This in turn implies that there is no scope for individual profits or gains. Any surplus generated in this fund – which is income over expenditure – is held by the association for future utilization to the benefit of the contributors. Complete tax exemption is given to funds/surplus funds to which the “Concept of Mutuality” applies.

So, what is taxable and what is not?

Income NOT subject to tax

a) Contribution from Members

Maintenance Charges, Electricity charges, Penalties, Interest charged on outstanding Maintenance Charges etc. – are the typical contribution by members of the Association. The association merely works as an agent that collects these charges and uses them for various common expenses. Any surplus during a fiscal year is carried forward to the next fiscal year, with no tax implications.

b) Interest earned from Co-operative Banks

If any investment is made in co-operative banks, the interest earned from such investment qualifies for deduction @ 100% under section 80P(d).

Update on 17-Jan-2013: This is becoming a grey area, especially after the Supreme Court Judgment on 14-Jan-2013, in the case of Bangalore Club vs. CIT.

c) Dividend

If the Dividend income is received from Indian Companies, the dividend is fully exempt under section u/s 10 (34). Dividend received from Co-operative Banks qualifies for exemption under 80P(d) is therefore 100% deductible.

d) Rentals received from members for utilizing facilities

If common facilities such as community hall, open spaces, terrace etc., are rented out to members for a fees, the income is not taxable, thanks to “Concept of Mutuality”

Income subject to tax

a) Interest earned from banks other than co-operative banks

If investments are made in banks which are not co-operative banks, interest earned from such investments are subject to Income Tax

b) Rental Income from Advertisement Hoardings

This is fully taxable under the head Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis. Here the payer is responsible to deduct TDS from the payments made to the association.

c) Rental from Mobile / Cable Towers etc

Rental from mobile & Cable Towers is taxable under the head Income from House Property; considering the same it is eligible for standard deduction u/s 24 (a) @ 30 % of the rent. Also if the association has taken loan to build the tower structure, a proportionate deduction can be claimed for interest paid on borrowed capital.

d) Rentals received from non members for utilizing facilities

“Concept of Mutuality” does not apply to this Rental and it is fully taxable under the head Income from House Property & may qualify for deductions mentioned in point 3 above.

To conclude, it is a must for associations to get PAN registered in the name of the association and file Income Tax Returns regularly. Even if an association does not have taxable income due to deduction available (e.g., investments only in co-operative banks), it is necessary for the society to prove this, which is possible only with a Income Tax return filing.

Sources: Our thanks to CAclubindia, The Hindu and Feeleminds.

Note: The Accounting Applications in ApartmentAdda – Maintenance Fee Tracker and Expense Tracker are tightly integrated with the residents database, making it very convenient to track taxable and non-taxable income. For more information please see the features page.



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Comments

  1. Amit says:

    Thanks for this useful information. For the taxable income what is the tax rate applicable to aptmt owners associations?

  2. Sridhar Shankar says:

    Hi Amit, I believe the tax rate is same as that applicable to individuals.
    Rgds.
    Sridhar.

  3. AKumar says:

    This is news to me.. Last year we actually paid tax on retained earnings from member contribution! Thanks!

  4. Venkat Ramana says:

    Does this mean that if Builder is paying interest for maintenance advance paid by owners, will be taxable? He is definitely not investing in co-ops.

    Any clarity on this?

  5. san says:

    Venkat: Yes, the Interest earned on the Maintenance Advance will be taxable, unless it has been financially engineered by the Builder :)

  6. Sakthivel says:

    Dear All,

    How is the capital expenditure to be incurred by the apartment association is to be shared by the residents? Is it equally or proportion to the UDS they possess?

    Kindly clarify. Thanks.

  7. Biju AK says:

    Can i have some clue on Service Tax liability of apartment association

  8. Neeta Agarwal,CA says:

    Hi Biju,
    An Apartment Association is a mutual association.Mutual dealings arise out of a mutual association.To constitute a mutual association,a number of persons associate together to subscribe money for a fund for the purpose of it being spent on their own welfare.No person can trade with himself or provide service to himself in tax parlance.Hence,there is no question of service tax liability for apartment associations on the maintenance fee collected/paid.

  9. Rajeev Gupta says:

    Wheather TDS will have to be deducted by an Apartment Association from the payment made to a Lawyer for contesting a case against the Builder ?

  10. Malaprabha residents welfare association says:

    Whether there is any service tax liabilities for the apartment owners/residents welfere association

  11. Vibhor Mathur says:

    Is service tax applicable on parking charges collected by rwa from the residents.????

  12. kesavan.k says:

    If a RWA has interest income from savings or FD from amount invested in a nationalised bank can it give from 15G for non deduction of TDS if it declares that it’s income is not taxable.

  13. Nitin says:

    Will taxation will be as per the tax slabs for the individual like upto 1.60 exempt & so on.

  14. san says:

    Hello Nitin, as per our information, you are correct. Taxation of Associations is the same as applies to Individuals.

  15. Aditya Kumar says:

    Service Tax: our RWA too
    k legal advice from a reputed tax legal firm. We have been advised to charge & deposit sevice tax where collection is more than 3000/- per month per appartment owner. Can someone clarify this.

  16. san says:

    This is the same rule followed in all the Associations we know that collect/pay service tax. Not sure about the logic behind it. Will be eager to know!

  17. Dipesh Shah says:

    Hi,

    We have created RWA for our appartment, need to know if we open a bank account in Public Bank like SBI, interest earned on savings/ FD shall be taxable.

    If you can clarify about getting PAN card for RWA

    Thanks
    Dipesh Shah

  18. san says:

    Hello Dipesh, per our knowledge such interest earned will be taxable. However, you could check with the SBI bank itself or with a tax consultant regarding any special treatment for Public Banks. To apply for PAN card for your RWA, you can use this site: https://tin.tin.nsdl.com/pan/newpan.html

  19. MJ says:

    Is apartment associated required to cut TDS from payment to various vendors ?

  20. Narayan says:

    Pls note a Co-operative Housing is not an Association of Person for Income Tax purposes. There is category called Co-operative.

    Also , pls do not give note the below related to taxation of Co-operative housing society.
    1. Any Income earned by the society from its members in not taxable.
    2. Interest earned on FD with Co-operative bank is not taxable u/s 80P.
    3. Interest incomes on FD with any other bank is taxable.
    4. Cell tower rental income is taxable as Under the head Hosing property.
    5. Any other income from non-members ( e.g. Terrace rental, Open space , Haording chgs etc etc) is also taxable.
    6. The tax slab for so-op is as follows.
    a. 0-10K @ 10%
    b.10k -20k @ 20%
    c. 20k and above 30%.
    In addition cess of 3% is applicable.

  21. Narayan says:

    MJ,

    Payments made to vendor are subject to TDS.

    Conditions for TDS deduction

    1. If 1 bill exceed Rs 30K.
    2. Total of all bills from the vendor is a year exceeds Rs 75K.

    TDS amount to be deducted:
    1. For individuals 1%
    2. For companies 2%.

    Pls refer to IT rules for details.
    Qtr ly TDS returns have to be filled.

  22. Sridhar says:

    1. Do we required to collect the service tax towards monthly maintanance charges from all residents?
    2. Do we require to pay the service tax to the vendors like House keeping, Security., etc?
    3. Do we require to deduct the TDS while paying the bills
    4. Do we require to file returns every year?
    5. Do we require to obtain a PAN card for welfare Association?

  23. k.v.pai says:

    Information compiled and various clarificatory comments are very useful. Thanks a lot..

    I HAVE QUERY.PL HELP.

    We , the Apartment Owners Association plan to create additional parking slots to provide to those members who are not provided parking area by the developer.

    The 5 number of parking slots are proposed to be provided on a vacant common area by spending about Rs 5lakhs.The allottees will be charged rs 1.50 lakhs per slot.The excess amount of Rs2.50 lakhs will be utilised for certain repairs, painting etc.of the apartment.

    Whether we are required to pay tax on Rs 2.50 lakhs .

    Pl clarify early.