Taxability of advance forfeited on sale of land and building

Seller of properties often receives advance towards sale consideration of land and building. At times, due to unsuccessful negotiations the sale may not take place. However, the seller may retain the advance.

The tax treatment of any amount received as advance forfeited by the seller for non-compliance by the buyer with the clauses in the agreement can be classified under the below two scenarios:

  • If advance was received and forfeited before 01 April 2014
The advance received and retained should be reduced from the cost of acquisition while calculating capital gains. Hence, the taxability of advance forfeited was postponed to the year of actual transfer of capital asset.

However, if the advance had been received and retained by the previous owner and not the seller himself (for example, in case of sale of inherited property), then the same would not go to reduce the cost of acquisition of the seller.

  • If advance was received and forfeited on or after 01 April 2014
Advance forfeited to be taxed as “Income from Other Sources” in the year of forfeiture of advance. 

Disclaimer: The views / the analysis contained therein do not constitute a legal opinion and is not intended to be an advice. Readers of this document are advised to seek their own professional advice before taking any course of action or decision, based on this document.

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