Resident welfare association (RWAs) is categorized as Association of Persons (AOP) under Income Tax Law. They act as the voice of their members and not only take care of ensuring good maintenance of the place but also represent members when and where needed on matters related to the place.
Theses associations run on subscriptions obtained from members and this is exempt on the mutuality basis in the view that no one can make income out of himself. The principle of mutuality derives from the concept that income earned by a person from external sources is taxable. Thus income derived from oneself cannot be treated as income and thus cannot be taxed.
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So question here is which income of RWA is TAXABLE and which is NOT TAXABLE?
1. Member’s Contribution-
RWA collects contribution from members and is incurred for the welfare of members. Amount collected is spent for maintenance of common area, electricity charges etc. It acts as agent of members and thus no income tax is charged on such contributions.
2. Rental Received from Members-
Rental received from members for common facilities is not taxable due to Concept of Mutuality.
3. Interest Earned From Co-operative Banks-
Interest earned from co-operative bank qualifies for deduction u/s 80P (d).
But one thing has to be kept in mind interest earned from investment in other banks or financial institution is chargeable to tax. Also one must take guidance from judgment of Hon’ble Supreme Court in the case of M/s Bangalore Club vs. CIT. In the given case Supreme Court held that three conditions have to be satisfied for receipt to be exempt on principles of mutuality.
- There must be a complete identity between the contributors and participators.
- Actions of the participators and contributors must be in furtherance of the mandate of the association.
- That there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves.
4. Dividend from Indian Companies-
Dividend received from Indian companies is also exempt u/s 10(34).
5. Rental Income from Advertisement Hoardings-
This is fully taxable as income from other sources. However expenses can be claimed against such Income.
Thus to conclude with we can say that if Income received by RWA from Non Member exceeds the taxable limit then only RWA is liable to file the Income Tax Return in Form ITR-5. Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.
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The topic should also have mentioned the taxability of RWAs registered under the Societies Registration Act or any similar Act of the State, to MaXimum Marginal Rax. As per Section 167B, registered societies are not taxed under MMR, isn’t it? There is a Hyderabad ITAT decision on this
We have an RWA, with no registration n PAN. But has bank a/c which is frozen now for want of PAN. We have only maintenance contribution which is around 3 lakhs PA n no other income, If we take PAN is it mandatory to file return in our scenario? Would b grateful for your reply…
Hi Mr Tarun
Can you please help me in finding any circular/notification of CBDT which speaks of any upper limit of subscription from members of RWA ? As we all know that law of mutuality makes such receipts tax free income in the hands of RWA
Dear Sir, please let me know that TAN is mandatory in case of RWA’s, what is the threshold limit.
Will the RWA, being a society registered under The Societies Registration Act, be required to deduct tax at source on payments made for maintenance, security guards etc. if the payments exceed the limit specified under section 194C? Will it require a TAN?
Please refer to https://taxguru.in/income-tax/taxability-resident-welfare-associations-income-tax-act.html wherein the Supreme Court has clarified as under:
There are 2 points to be understood.
Interest earned on deposit is taxable and subject to TDS. However in CIT Vs Bangalore Club , SC has ruled that any action in furtherance of the mandate of Association without profiteering is exempt. So the Interest earned has be adjusted against the expenses and only profit is taxable. Since the Society is not making any profit and not liable to pay tax.
Income from hoardings is to be adjusted against the expenses and only net amount is taxable.
So RWA/ Societies for the maintenance common facilities are not liable for tax.
Please clarify
How to show the monthly maintenance charges received from members in ITR 5? If we declare gross receipts as income and expenses as deduction, how to avoid taxation of the surplus under mutuality clause? Do we need to disclose the total amount collected and direct expenses in the ITR?
Did you get any suggestion for the same!!
Is sinking fund collected from members of RWA income and is it subject to income tax or is it a liability and is not subject to income tax? Please clarify
Hi
Can we build batmenton court in common amenities and lease to some other people taught th at we can use the lease amount to colony developing activities
How to show the monthly maintenance charges received from members in ITR 5? If we declare gross receipts as income and expenses as deduction, how to avoid taxation of the surplus under mutuality clause? Thanks in advance.
Question: Can the member be reimbursed under a situation when he/she looses his/her job? Will such reimbursement be taxable??
We are an unregistered Association of 11 apartments. Members are paying a monthly maintenance charges of Rs. 2000/- per month which works out to an annual amount of 2,64,000/-. The lift is being modernised at a price of Rs.4,25000/- for fabrication, supply and installation parts for modernisation. Being a contract are we liable to deduct TDS if not under what provision or circular. We do not have a PAN card for the association. We will appreciate your advice on the same.
Maintenance charges paid for Flats
Dear Sir,
I am a salaried employee and paying tax. I am claiming Interest and principal by submitting the proofs. I am paying 8000 per annum as maintenance charges for the flats. Can I claim deduction and get refund? If so what are the procedures? Can I show the entire amount for deduction? In ITR form in which column should I have to fill the amount? There is no association due to non cooperation and one person self styled coordinator collects the amount as per his whims and fancies. Accountability is not upto the mark.
Need a reliable auditor for our newly formed resident welfare association in Whitefield Bangalore. Please drop an email with your contact to tc.bong01@gmail.com. Reference to any known apartment association in the neighborhood is a plus. This is an immediate requirement.
Can the Interest income on FD with Banks be set off against the loss incurred by the residents’ welfare association ?
What about the income derived from private communication devices installed on the terrace, is it taxable? If RWA claims to be No loss, no profit entity, how is income derived from such towers on the terrace is treated?
Is Resident welfare association considered a service provider? If not, why does RWA threaten to cut-off services when maintenance or other dedicated amounts are not paid by the flat/owner/s. Are there any supreme court rulings to that effect….that RWA is indeed a service provider!
In My opinion, Resident welfare associations (RWAs) which are NOT cooperative housing societies are not eligible for 80P deduction for interest on FDs with cooperative banks.
[80P. (1) Where, in the case of an assessee being a co‑ operative society,…
…(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;]
Dear Readers,
I have received many queries regarding my conclusion in the article that “Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.”
So I would like to hereby clarify that,
Income Tax is charged at the rates specified in Part I of the First Schedule of Finance Act, which clearly states that In case of an Individual (resident or non-resident) or HUF or Association of Person or Body of Individual or any other artificial juridical person slab rates are applicable. From where we conclude that “Tax rates applicable to AOP are same as that of applicable to Individuals.”
However, there is specific Section 167B in Income Tax Act, which governs the tax rate where shares of members in association of persons or body of individuals unknown. Thus, there are instances when AOP is charged at Maximum Marginal Rate i.e. MMR and sometimes even at a rate higher than MMR.
So it is the case with most of RWAs, if shares of the members are indeterminate or even if the share of members are determinate and any of the member of the RWA has the income more than the maximum amount not chargeable to tax, then it get charged at MMR and even at rates higher than MMR due to applicability of Section 167B.
Dear Readers,
I have received many queries regarding my conclusion in the article that “Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.”
So I would like to hereby clarify that,
Income Tax is charged at the rates specified in Part I of the First Schedule of Finance Act, which clearly states that In case of an Individual (resident or non-resident) or HUF or Association of Person or Body of Individual or any other artificial juridical person slab rates are applicable. From where we conclude that “Tax rates applicable to AOP are same as that of applicable to Individuals.”
However, there is specific Section 167B in Income Tax Act, which governs the tax rate where shares of members in association of persons or body of individuals unknown. Thus, there are instances when AOP is charged at Maximum Marginal Rate i.e. MMR and sometimes even at a rate higher than MMR.
So it is the case with most of RWAs that, if shares of the members are indeterminate or even if the share of members are determinate and any of the member of the RWA has the income more than the maximum amount not chargeable to tax, then it get charged at MMR and even at rates higher than MMR due to applicability of Section 167B.
Thanks,
Tarun Kumar
Dear Readers,
I have received many queries regarding my conclusion in the article that “Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.”
Income Tax is charged at the rates specified in Part I of the First Schedule of Finance Act, which clearly states that In case of an Individual (resident or non-resident) or HUF or Association of Person or Body of Individual or any other artificial juridical person slab rates are applicable. From where we conclude that “Tax rates applicable to AOP are same as that of applicable to Individuals.”
However, there is specific Section 167B in Income Tax Act, which governs the tax rate where shares of members in association of persons or body of individuals unknown. Thus, there are instances when AOP is charged at Maximum Marginal Rate i.e. MMR and sometimes even at a rate higher than MMR.
So it is the case with most of RWAs, if shares of the members are indeterminate or even if the share of members are determinate and any of the member of the RWA has the income more than the maximum amount not chargeable to tax, then it get charged at MMR and even at rates higher than MMR due to applicability of Section 167B.
Thanks,
Tarun Kumar
Dear Rajesh
Income of RWA is exempt to the extent it is derived from the activities of mutual nature. Income derived from members is exempt on the grounds of mutuality.
The amount of interest earned by the RWA from the FDRs with bank will not fall within the ambit of the mutuality principle and will therefore, be taxable in the hands of RWA.
Thanks,
Tarun Kumar
Dear Sudharshan Reddy
Such type of contribution are disallowed u/s 40A(9).
As per Section 40A(9) “ No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force. “
Thanks,
Tarun Kumar
very well explained , keep writing
Would like to know whether the residential society can claim tax exemption if they make investments in tax saving FD’s and mutual funds
Hi all,
Actually some Xltd director formed a AOP for the welfare of employees by contributing some amount to that AOP. Same amount has been invested in the banks and the amount received as a interest they were paying to employees.
Now my question is
Whether we can claim that expenditure as a deductible expense under IT act? as per which sec?
It is always the owner responsible for payment of maintenance charges. It is the tenant, paying the maintenance on behalf of the owner. It is the amount to enjoy the society benefits, for which he is paying the rent to the owner.
Hence the surplus, if any is considered to be contribution by the owner only.
Maximum marginal rates come into existence where income derived by the RWA.
RWA shall not have share at all for the members. It is not undetermined share. All members are equal share holder of the services of the RWA. But not for any share of profit.
Nice article. Keep sharing.
Dear Anuj,
Agreed with your point. But for most of RWAs, member’s contributions form the major source of their income and that income is exempt on the ground of mutuality.
However, if RWA generate income from Non Members as well, that may attract tax as per provisions of Section 167B. Then definitely it would be better to opt for co-operative society to enjoy the benefits of slab rates rather than being taxed at the Maximum Marginal Rate.
Dear Mr. R.K Gupta,
Surplus arising is exempt on the Ground of Mutuality. But remember the principle of mutual association is that all the contributors to the common fund are entitled to participate in the surplus and all the participators to the surplus must be the contributors to the common fund.
Sir,
Point (2) of your article which is reproduced here below is contradictory.
“Rental Received from Members- Rental received from members for common facilities is not taxable due to Concept of Mutuality.
“Concept of Mutuality” does not apply to this Rental and it is fully taxable under the head Income from House Property.”
Pls clarify.
Thanks
CA Hitesh
Dear Tarun,
Nice article. But just to point out- the tax slabs apllicable to AOP make the scenario rellay complex.
If shares of the members are indeterminate,then AOP will be charged at the maximumum marginal rate. This will be the case for RWAs because the agreement generally dose not specify shares.
Even if the share of members are determinate and any of the member of the AOP has the income more than the maximum amount not chargeable to tax(i.e. basic exemption limit)(which wil be the case in most RWAs), then AOP will be charged at the maximumum marginal rate.
So considering this, it would be prudent to go for a co-operative society at least from tax point of view.
Anuj Tiwari
9978887371
The owner is a member of RWA and he let out his office space to a co. Now the co. is paying maintenance charges for common area, electricity used in common area and, lift plus AC and DG maintenance charges. Now the surplus if arises is taxable? Pl advice.