Income Tax and Rebate for Apartment Owners Association

Apartment owners association plays vital role in maintenance of apartment and works for welfare of its members. Apartment owners association may or may not be registered but it is always recommended to register the association to sue or defend any legal action. Apartment owners association collects maintenance charges from its members and earns revenue from advertising, distributing brochure, pamphlets etc. The apartment owners association has obligation to pay income tax as applicable in the case of an individual. Apartment owners association is also eligible for deduction and tax rebate as in case of individual.

Association of Persons

Under Income Tax Law, apartment owners association is categorized as Association of Persons (AOP). An association of persons (AOP) under the Income Tax Act is an entity or unit of assessment. But, an AOP does not mean any and every combination of persons. It is only when, they associate themselves in an income-producing activity that they become an association of persons. An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activity.

Income Tax exempt on mutuality basis

Associations such as apartment owners’ association or any mutual association run on subscriptions obtained from members for maintenance, mutual help, and recreations, whether periodically made or received as entrance fee or as ad hoc contributions from time to time are all exempt on 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 thus cannot be taxed.

Exemption of Income Tax

The concept of mutuality means that there is no scope for individual profits or gains. Complete tax exemption is given for funds or surplus where the concept of mutuality applies. There are incomes which does not attract tax for apartment owners association. Following are income not subject to tax.

• Interest Earned from Co-operative Banks: Apartment owners association has to pay income tax on interest earned on any investment made in banks or other financial institutes except co-operative banks. Interest earned from investment made in co-operative bank qualifies for 100 per cent deduction under Sec 80P (d).

• Income earned from its member’s contribution: Apartment owners association collects fee for maintenance of apartment, electricity charges, maintenance of common area, interest or fines received from defaulting members etc. The contribution or any surplus fund is carried forward to next fiscal year and no income tax is charged on such contributions.

• Rentals received from members: The apartment owners association can rent out common facilities in apartment to its members for a fee. Common facilities can be community hall, open terrace and other facilities available in apartment. The rental or fee received from members is not taxable under the concept of mutuality.

• Dividend from Indian Companies: Under Sec 10 (33), Dividend from Indian Companies, Income from units of Unit Trust of India and Mutual Funds, and income from Venture Capital Company/fund are exempted from income tax. Divided received from Co-operative banks are qualified for 100 per cent tax exemption under Sec 80P (d).

• Exemption on donations made: Apartment owners association can enjoy 100 per cent tax deduction on donations made for medical relief set up by state government, donations made to national sports fund, prime minister’s national relief fund, for approved educational institution of national importance etc.

Tax Rebates (Sec 88 and 88B)

Certain payments which qualify for such tax rebate are:-

1. Subscription to the National Savings Scheme of the Government.
2. Contribution to a statutory or recognized provident fund, approved superannuation fund or public provi­dent fund.
3. Payment in a ten year or fifteen year account under the Post Office (Cumulative Time Deposit) Scheme.
4. Subscription to the National Savings Certificate (VIII issue).
5. Subscription to equity shares or debentures or to units of any mutual fund approved by the Board.

Apartment owners association has to get PAN in the name of association. Concept of mutuality helps apartment owners association to get 100 per cent tax relief on income earned from contribution and rentals paid by its members. But apartment owners association will have to pay income tax for rent received from non-members, advertisement of hoardings, rents from mobile or cable tower etc. Interest earned from deposits or interest on investments other than co-operative bank will attract income tax. If an apartment owners association does not have taxable income after deduction available, it should be proved and association has to file income tax return. It is always recommended to audit the books of accounts and maintain books of record for smooth functioning of association’s day-to-day affairs.