Is the Security Deposit From Your Tenant Taxable Income?

A refundable security deposit under a leave and licence agreement is generally not income: ITAT Mumbai treated it as a loan in the capital field. Advance rent and damages are different.

Mumbai deposits are large, often several months' rent. Owners ask whether they need to show it as income. In most cases, no.

What the Tribunal said

In ACIT v. Das & Co. (ITAT Mumbai, decided 27 August 2009, assessment year 2003-04), the Tribunal held that a security deposit taken under a leave and licence agreement to secure the licensee's obligations is in the nature of a loan, in the capital field. It is not income.

In that case, even the deposit forfeited on early termination was treated as a capital receipt, because it was not in place of rent. But Rs 24.37 lakh received as damages in lieu of rent was taxed as income.

A deposit you will return is not income. Money you keep in place of rent usually is.

How to think about it

Refundable deposit you hold and return: generally not income.
Advance rent: it is rent, just paid early.
Amounts kept for unpaid rent or as damages in lieu of rent: likely taxable as income.
Deductions for genuine damage to the flat: keep the bills and photographs.

Keep it clean

Take the deposit by bank transfer and write the amount in the registered agreement.
Refund by bank transfer and record any deductions in writing.
Remember the deposit also affects stamp duty on the agreement. See how stamp duty is calculated.

Frequently asked questions

Is a security deposit from a tenant taxable in India?

A refundable deposit taken to secure the licensee's obligations was treated by ITAT Mumbai in ACIT v. Das & Co. as a loan in the capital field, not income.

Is money kept from the deposit taxable?

Amounts kept in lieu of rent or as damages for rent are likely to be taxed as income. Check your facts with a CA.

Sources

BCAJ: Security deposit under leave and licence is in the nature of a loan (ACIT v. Das & Co.)

This is general information, not legal or tax advice. Rules change, so check your own case with a lawyer or CA.

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Yanik

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