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.
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 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)
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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Apartment Accounting Software,
Home owners Association,
Society Accounting,
Society Tax
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