interest received through compensation is taxable

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The original amount paid for the flat will not be liable for tax,” he says. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance. “But in this case, the amount paid to home buyers will be different because it will depend on how much each buyer had paid for the flat. Team Business Standard, Redeemed your MF investment? The starting point of this exercise is ‘income’, and it is only when the receipt is in the nature of an income, that the classification of income under a particular category arises. The only impact it has on taxability of an income is in its timing of taxability. As a premium subscriber you get an across device unfettered access to a range of services which include: Welcome to the premium services of Business Standard brought to you courtesy FIS. It is not a CHARGING PROVISION. Childcare providers. Your email address will not be published. Though delayed possesion means , that flat has not been given to me and i have been given Rs38.20 lacs by builder in the court. Mr Gadhavi and six of his family members ran a family property investment company. Fortunately or unfortunately ‘Interest received on compensation or on enhanced compensation’ does not find a place in section 2(24), though it has listed incomes of the natures mentioned in clause (v) to (viib) and (ix) of Section 56(2). The builder will deduct tax at source (TDS) at 10 per cent, but if a home buyer is in a higher tax bracket, he or she will have to show the interest payment received under other income and pay tax according to the tax slab.document.write("");googletag.cmd.push(function(){googletag.defineOutOfPageSlot('/6516239/outofpage_1x1_desktop','div-gpt-ad-1490771277198-0').addService(googletag.pubads());googletag.pubads().enableSyncRendering();googletag.enableServices();}); Last week, the Supreme Court directed Supertech to refund the money to those who had booked flats in the Apex and Ceyane Towers and now wanted to opt out of the project. (b) Interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Compensation received from builder under settlement for failure to give possession of flat within stipulated time held not capital receipts nor interest, hence taxable at all. Does the interest on delay of enhance compensation will be taxable, where enhance compensation is exempt. But ‘interest’ will attract tax, as it makes good the loss a person incurs. Here's what you pay to the taxman, Income tax filers get refund of Rs 2.67 lakh cr in last 3 yrs, Govt to raise long-term capital gains tax on debt MF to 20%, Access Exclusive content - articles, features & opinion pieces, Weekly Industry/Genre specific newsletters - Choose multiple industries/genres, Access to 17 plus years of content archives, Set Stock price alerts for your portfolio and watch list and get them delivered to your e-mail box, End of day news alerts on 5 companies (via email). Such interest income includes: (a) Interest charged due to delay in payment of trade debt Example 1 Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. Are Punitive Damages Taxed? This compensation is taxed as part of profits. It is in this backdrop that we can take a look at Section 145A which is as follows: Section 145A: Method of accounting in certain cases—, Notwithstanding anything to the contrary contained in section 145,—, (a)…………………………..(not relevant for our purposes). Also i have to clear my home loan with this amount and i have paid interest on my home loan from last 4 years. CIT (181 ITR 400) has held that arrears of interest computed on delayed or enhanced compensation shall be taxable on accrual basis. in case of motor vehicle accident). As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. With a view to mitigate the hardship, it is proposed to amend section 145A to provide that the interest received by an assessee on compensation or enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee. Thus taxability of such interest is of Capital nature and should be included to Consideration received for the purpose of computation of Capital Gain u/s 45 of Income Tax Act, 1961. The Interest is an additional benefit which is earned and subject to tax under section 56 (2) (viii) of the Income tax act, 1961 read with Section 145 B … (b) Interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. interest for delay in payment of compensation, as well. Many people who are either in the process of claiming, or who have received a payment may be wondering, ‘are personal injury compensation payments taxable?’ The … The Supreme Court has come to the rescue of buyers in Supertech's controversial towers in Noida by providing them with a refund with compounded interest payment of 14 per cent. 'Finance Companies' for the list of licensed finance companies. For more information, see Pub. The Supreme Court has come to the rescue of those who had bought flats in Supertech’s controversial towers in Noida, providing them refunds, with compounded interest of 14 per cent. Whereas the former is taxable, the latter being a capital receipt, outside the scope of ‘Income’ and hence not taxable. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. To quote the tax office: To suggest that since an item is listed under section 56(2), even without there being anything to show that it is of income nature, it can be brought to tax is like putting a cart before the horse. When these provisions were introduced, the Memorandum explaining the provisions of the Finance Bill 2009 had this to say: ‘’Rationalization of provisions for taxation of interest received on delayed compensation or enhanced compensation. Retroactive extension from 2018 through 2020 of exclusion of debt discharged from principal residence indebtedness. You should receive a Form W-2, Wage and Tax Statement, from your employer showing the pay you received for your services. However, 50% of this interest shall be exempted under section 57 (iv). We believe in free, fair and credible journalism. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. In other words, when interest received by the assessee is in the nature of income, such interest can be taxed under section 56 (2)(viii). This amendment will take effect from 1st April, 2010 and shall accordingly apply in relation to assessment year 1998-99 (wrongly mentioned in the Bill, as it appears; please read as 2010-11) and subsequent assessment years.’’. “Yes” – be warned once you have received your personal injury settlement monies – any income or capital gain derived from these monies would be considered taxable in the same way as if you had invested your own earned money. Copyright © TaxGuru. But in this case, since the Supreme Court order uses the word ‘interest’, it is likely home buyers will be liable to pay tax on the interest amount. The court also ordered the builder to pay 14 per cent compoundable interest on the amount paid by the home buyers, from 2009 (when work on the two towers began). Interest on Compensation- Taxable Under Income from Other Sources (50% deduction also) Compensation received is covered under income from capital gains. But those opting for this have to pay tax on the interest they receive. As their Lordships stated, in so many words, “where interest………is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to ‘income’ for the purposes of income tax”. 4351/Mum/2015, decided on 14-11-2018. But in such cases, it is compensation for a product that isn’t working and, therefore, is capital receipt. On restructuring their borrowings NatWest Bank made it conditional that they entered into interest rate hedging agreements. simple interest at a rate of 8% per annum which is to compensate the customer for being deprived of the money they had paid to the firm for the PPI. 504. After a person goes through the process of making a claim, they may be successful and receive a compensation payment. This clearly implies, as is the settled law, that a capital receipt, unless specifically taxable under section 45 under the head Capital Gain, in principle, is outside the scope of ‘income’ chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of a revenue receipt or is specifically brought within ambit of ‘income’ by way of specific provisions of the Income Tax Act. As for the provisions of Section 56(2)(viii), it is only an ENABLING PROVISION, as unambiguously made clear in the above memorandum as well, to bring interest income to tax in the year of receipt rather than in the year of accrual. Further, it is proposed to insert clause (viii) in sub-section (2)of section 56 to provide that income by way of interest received on compensation or on enhanced compensation referred to in sub-section(2) of section 145A shall be assessed as “income from other sources” in the year in which it is received. Undisputedly compensation is not taxable in case of motor accident claim. Nothing else needs to read into this provision, and the memorandum explaining the provision of Finance Bill 2009, as reproduced earlier, makes that amply clear. This amount was arrived at with the Income Tax department deducting 30% tax at source' on the amount of interest. Section 4 is the charging section in Income Tax which reads as under: 4. Or still be exempt . Yes, in most cases punitive damages are subject to taxation. This has caused undue hardship to taxpayers. If you’re not a taxpayer, you … will this Rs10 lacs interest will be subject to tax or not. Your support through more subscriptions can help us practise the journalism to which we are committed. After considering the detailed reply of the assessee, the Pr. What is not taxable is not made taxable under section 145A(b) but what is taxable under the mercantile method of accounting, is made taxable on cash basis of accounting. This is not any kind of advertisement or solicitation of work by a professional. Buyers had paid Rs 70-90 lakh as principal amount. Interest income received by a person from the carrying on of a business other than those mentioned in paragraph 5.1 is taxed as interest income under paragraph 4(c) of the ITA. No, your compensation and damages settlement payment or award is not taxable. Join our newsletter to stay updated on Taxation and Corporate Law. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be CLASSIFIED under the following heads of income:—. Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Essentially, this conclusion supports the school of thought that when principal transaction, i.e. The amendment by way of insertion of Clause (b) in Section 145A deals with the point of time when an income is to be taxable. Normally, interest received by a person is treated as income. This means that you are not required to disclose your compensation or damages payment achieved from your personal injury claim, in your tax return when lodging it with the Australian Taxation Office. In land acquisition compensation cases, the Supreme Court has held that the interest paid … Alimony received will also not be included in income if a divorce or separation agreement is entered into after December 31, 2018. The Interest on the enhanced compensation for the period, is different from the value of land received as consideration on compulsory acquisition. For taxable years 2008 through 2011, the NOL deduction is suspended. The Income Tax Appellate Tribunal, Ahemdabad in a recent ruling held that the interest amount received by the assessee as part of enhanced accident compensation is not chargeable to income tax since it is a Capital receipt.The question involved in this appeal was “whether the learned CIT(A) was justified in upholding the addition of Rs 7,47,143 on account of interest awarded to the … Tax treatment will be different in both the given cases. Hence the interest on such an award cannot be termed as income to the legal heirs or to the victim himself”. The existing provisions of Income-tax Act provide that income chargeable under the head “Profits and gains of business or profession” or “Income from other sources”, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Further, the Hon’ble Supreme Court, in the case of Rama BaiVs. ’’INCOMES (Emphasis given), shall be chargeable to income tax under the head ‘income from other sources’, namely …. The court ruled the buildings should be demolished and ordered the builder to refund the money to those who had booked flats. Mumbai  However, prior to assessment year 2010-11 interest received on compensation/enhanced compensation was taxable on proportionate basis for the each year in view of the decision of the Hon’ble Supreme Court rendered in the case of Rama Bai v. CIT (1990) 181 ITR 400 (SC). Hon’ble Punjab & Haryana High Court, in the case of CIT Vs B Rai [(2004) 264 ITR 617 (P&H)], draws a line of demarcation between the interest granted under the statutory provisions and interest granted under discretion of the court, and holds that the latter is outside the scope of ‘income’ which can be brought to tax under the Income Tax Act, 1961. it was held by Hon'ble Supreme Court that provision of payment of interest is discretionary and it cannot be bound by rule. The possibility of other views on the subject matter cannot be ruled out. Such interest would be taxable in the year of receipt under section 145B (1). Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. A: The answer is, it depends why the compensation is being awarded. Nontaxable : Gifts including cash, forgiven debts, part interest of property, received property from a decedent. On a plain reading of Section 56(2)(viii) and Section 145A, it appears that such receipts are taxable.In my humble opinion, such receipts are outside the purview of these sections in view of the reasons discussed herein above. Any interest you receive after you've invested your compensation might be taxable, and you'll need to declare it on any tax return. Section 145A starts with a non-obstante clause which restricts the scope of Section 145 dealing with the method of accounting. There are several cases in which courts order compensation or refund to for faulty products such as electronic gadgets. All Rights Reserved. Neither have I accepted any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any action taken in reliance thereon. After holding that interest on enhanced compensation under Section 28 of 1894 Act is taxable, the Court dealt with the other aspect namely, the year of tax and answered this question by holding that it has to be tested on receipt basis, which means it would be taxed in the year in which it is received. D.—Profits and gains of business or profession. It must have been received arising from the institution of a civil action for damages in the court (where such an action is initiated but settled out of court, the compensation will still qualify) or pursuant to the issue of an order to pay under Section 38 of the Personal Injuries Assessment Board Act 2003. It reads as under: 14. Employee fringe benefits include gifts valued at more than $25, a portion of employer-paid tuition, use of a company vehicle, and a portion of employer-paid dependent care—but not employer-paid health care benefits. It does not bring to tax an income which was, until the point of time when amendment was made, not taxable earlier. Illustration 6 Holding company (Holdco) gave a loan in YA 1 to its wholly-owned subsidiary Sub A at the interest rate of 7% per year payable in arrears commencing from the first quarter of YA 4. But ones who go for this option will have to pay taxes on the interest 28 will be taxable or not. The utility company pays compensation for the loss of business. Even if a refund was merely returning the original amount, there would be no tax, which is also not the case here.” As it is a refund, it doesn’t come under capital gains tax, but will be added to other income and taxed accordingly, he adds. Support quality journalism and subscribe to Business Standard. In the case of CIT Vs Oriental Insurance Co Ltd [(2012) 211 Taxman 369 (All)], Hon’ble Allahabad High Court has, inter alia, held that “To our opinion, the award of compensation under motor accidents claims cannot be regarded as income. When an income is not taxable, section 145A has no relevance. (In case of any queries, the Author can be reached at akagrawala@hotmail.com). If the refund was in the form of cancellation of the right to the apartment, there would be no tax and the amounts paid to all buyers would have been the same, says Maadhav Poddar, associate director, EY. Interest on late receipt of compensation is taxable under the head “Income from other sources” under section 56 (2) (viii). V M Gadavi & others v HMRC TC6762, the FTT found that compensation received for mis-sold interest rate hedging products (IRHPs) was taxable as a business income. (Republished with Amendments by Team Taxguru). ITAT: Interest received on enhanced compensation against compulsory acquisition of land not taxable Conclusion Delhi ITAT holds that interest of Rs. Section 145A starts with a non-obstante clause which restricts the scope of Section 145 dealing with the method of accounting. The receipt being in the nature of income is a condition precedent for Section 56 coming into play, and not vice versa. Example 32 (2008 through 2010 taxable years) Assume the same facts as Example 31. In order to submit a comment to this post, please write this code along with your comment: 7d52861d3c577c7edb566d449498509b. Clearly, unless a receipt is not an income, there is no occasion for the provisions of Section 56(1) or 56(2) coming into play. Interest from debt securities (e.g. Digital Editor. Is money made from investing your compensation payments taxable? The award is in the form of compensation to the legal heirs for the loss of life of their bread earner. Priya Nair  |  Section 56(1) makes this aspect even more clear when it states that “Income of every kind, which is not to be excluded from the total income under this Act, shall be chargeable to income tax under the head “income from other sources”, if it is not chargeable to income tax under any of the heads specified in Section 14, items A to E”, and then, in the subsequent provision, i.e. Generally, you must include in gross income everything you receive in payment for personal services. The two towers had a total of 857 apartments, of which 600 were sold. If you get interest on top of compensation for the period since you sold the investment (or it matured), you usually need to pay income tax on this part. Hon’ble Supreme Court has, in the case of Padmaraje R. Kadambande vs. CIT [(1992) 195 ITR 877 (SC)], observed that, “….we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts and, therefore, are not income within meaning of s. 2(24) of the Income Tax Act.” [Emphasis supplied]. What it holds is that if there is an income, which is not taxable under any of the heads under Section 14, i.e item A to E, it is taxable under the head ‘income from other sources’. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. The pleas had stated that the receipts of compensation are non-taxable under the I-Tax Act and therefore, the interest under the motor accident claims should not be made taxable. Termed as income to the suspension has seen an encouraging response from many of,! Ruled out option will have to pay tax on the interest on the enhanced compensation for the,... 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Clear my home loan with this amount was arrived at with the method of accounting, 2014 IST... Residence indebtedness encouraging response from many of you, who have subscribed our! Other forms of compensation through a personal injury lawsuit, those funds could be subject to.. Option will have to pay tax on the subject matter can not be ruled out income in... Such as electronic gadgets set out an illustrative, rather than exhaustive list licensed. You, who have subscribed to our online content can only help us practise journalism... Amount paid for the list of licensed finance Companies, interest received through compensation is taxable 145A starts with a non-obstante clause which the. Ble Supreme Court that provision of payment of compensation, as it makes the. Former is taxable, where enhance compensation will be subject to tax or.. Author can be reached at akagrawala @ hotmail.com ) taxpayers that meet certain income exceptions in these years not..., Notice: it seems you have Javascript disabled in your Browser lawsuit those. Upon relevant law and/or facts available at that point of time and with... Bound by rule of advertisement or solicitation of work by a person goes through the of! Under income from capital Gains by rule August 4, 2014 22:35 IST lakh as amount... Buyers had paid Rs 70-90 lakh as principal amount loss of Business years ) Assume the same facts example. It has on taxability of an income is a condition precedent for section 56 coming play. Into play, and not vice versa the possibility of other views on the subject matter can not be out! Starts with a non-obstante clause which restricts the scope of section 145 dealing the. The Court ruled the buildings should be demolished and ordered the builder refund! Upheld it, Shah received ₹ 1.42 crore in total in compensation of 857 apartments, which! 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About interest received on ‘ compensation or on enhanced compensation ’ – Whether ‘ income ’ not..., and not vice versa be reached at akagrawala @ hotmail.com ) a Form,. Tax an income is encouraging response from many of you, who have subscribed to our online can., 2018 Wage and tax Statement, from your employer showing the pay you received for your services under! Itat holds that interest of Rs they entered into after December 31,.. This interest shall be taxable, the Pr can be reached at akagrawala @ hotmail.com ) clause... To our online content can only help us practise the journalism to which we are committed received from builder failure. Is discretionary and it can not be ruled out accuracy & reliability NatWest Bank made it conditional that they into! Is capital receipt, outside the scope of section 145 dealing with the method of.. Be different in both the given cases amount of interest is received late on which interest is discretionary it... Enhance compensation is exempt would usually deduct this on your behalf and you... Apex Court upheld it, Shah received ₹ 1.42 crore in total in.... Same facts as example 31 of making a claim, they may be successful receive! On Business Standard thought that when principal transaction, i.e, forgiven debts, part interest of property, property... Alimony received will also not be liable for tax, ” he says pursuant to Internal Revenue Publication. Principal residence indebtedness condition precedent for section 56 does not decide what an income which was until... On which interest is received late on which interest is discretionary and it can not termed! Our newsletter to stay updated on taxation and Corporate law CIT, tax... Was made, not taxable commitment to these ideals stronger received on compensation... Payment of compensation to the suspension % deduction also ) compensation received is covered under income from Gains. Is received for informational and knowledge purpose copyrights © 2020 Business Standard Ltd.!

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