Is Rent and Corpus received during Redevelopment Taxable?

Is Corpus and Rent Received During Redevelopment Taxable? Here’s What the Law Says

Redevelopment of old housing societies is becoming increasingly common in cities like Mumbai, Delhi, and Pune. During this process, flat owners often receive a corpus fund and monthly rent or alternative accommodation from the developer. A common question that arises is:

“Do I have to pay income tax on this money?”

The answer, based on existing tax laws and judicial precedents, is:

👉 No, the corpus fund and rent received during redevelopment are generally not taxable.

Let’s break this down — with support from important case laws.

What Is a Corpus Fund in Redevelopment?

The corpus fund is a lump sum amount paid by the developer to each flat owner as part of the redevelopment agreement. It’s typically given:

• As a one-time compensation for the inconvenience caused,

• To cover future maintenance costs in the redeveloped building,

• Or to create a sinking fund for the society.

Why the Corpus Fund Is Not Taxable?

Under the Income Tax Act, only revenue receipts are taxable unless specifically included under capital gains. The corpus fund, being a capital receipt, is not taxable unless it arises from the transfer of a capital asset (like selling a property).

In redevelopment, you’re not “selling” your flat — you’re getting it back, improved.

Key Judicial Precedents:

1. Jitendra Kumar Soneja v. ITO [2016] 73 taxmann.com 205 (Mumbai - Trib.)
   The ITAT held that the corpus fund received for redevelopment was a capital receipt and not taxable in the hands of the assessee.

2. Smt. Sharmila Tagore v. JCIT (2005) 93 ITD 483 (Mum)
   The Tribunal held that amounts received as compensation for temporary relocation and inconvenience during redevelopment were capital receipts and hence not taxable.

3. CIT v. Smt. Lata Kuer [1979] 116 ITR 702 (Patna HC)
   Though not a redevelopment case, this ruling emphasized that capital receipts are not income unless the Act specifically provides otherwise.

Thus, the corpus amount is not income under any head of income and should be treated as a capital receipt, not taxable.

What About Monthly Rent or Alternate Accommodation?

During redevelopment, the developer may also pay monthly rent (or directly provide a flat) so you can live elsewhere while construction is ongoing. This raises the question — is this rent taxable?

The short answer:

👉 No, rent received during redevelopment is not taxable, as it is reimbursement or compensation, not income from a service or business.

Key Judicial Precedents:

1. IITO v. Dilshad Sorabji Contractor [2010] 41 SOT 452 (Mum)
   The ITAT held that the monthly rent received during redevelopment was in the nature of compensation for hardship and displacement, not taxable as income.

2. Maheshwar Prakash-2 Co-operative Housing Society Ltd. v. ITO [2009] 118 ITD 223 (Mum)
   The society received compensation for surrendering development rights to a builder. The Tribunal ruled this was a capital receipt, not taxable in the hands of the society or members.

3. CIT v. Saurashtra Cement Ltd. [2010] 325 ITR 422 (SC)
   Though not a housing case, the Supreme Court clarified that compensation for “sterilization of a source of income” (like temporary loss of house) is a capital receipt.

So, the monthly rent or compensatory allowance paid to you by the builder during redevelopment is not earned income — it is compensation for loss of residence and is thus not taxable.

Exceptions to Keep in Mind

• If you rent out the alternate accommodation provided to you and earn additional profit, that profit is taxable under “Income from House Property.”

• If a society receives amounts not strictly linked to inconvenience or compensation (e.g., commercial development rights), those may attract tax — though often in the society’s hands, not individual members.

Tips for Flat Owners

1. Maintain documentation – redevelopment agreement, rent receipts, and correspondence with the builder.

2. Declare exempt income in your ITR under the “Exempt Income” schedule for clarity.

3. Consult your CA if your case has unique features (e.g., TDS deducted, joint ownership, inherited property, etc.).

Final Word

With support from several court rulings and ITAT decisions, it’s clear that corpus funds and rent received during redevelopment are generally capital receipts, not taxable income.

While redevelopment may temporarily disrupt your routine, it need not disrupt your finances — at least not from a tax point of view.