The basic instinct of the modern urban individual is always to maximise their income. The sight of money often inspires a desire to grow it exponentially. And that inspiration has led the financial whizzes devise ways to grow money, literally. Fixed deposit(taking into account the principle of mutuality), interest rates on savings accounts, shares, security bonds, debentures and what not. Therefore, it is of no surprise, that a conglomerate of the modern urban individual, vis a vis gated communities or apartment complexes or housing societies, will definitely want to make financial investments for them. It is well known that a community raises funds regularly to spend on the upkeep of the property and the premises. However, all funds raised are often not spent in one financial year. So what can one do with the money saved?
The answer is very simple and rather obvious. The funds saved are invested in various deposit plans, like fixed deposit, in banks to gather interest and maximise income. (Do be mindful of the principle of mutuality here.) Every community must have the vision to achieve financial sustainability – lowering maintenance or being a maintenance free community. Investing the saved amount year on year, is the way forward.
In this blog post, we shall discuss one of the most popular and easy deposit plans preferred by several management committees and resident welfare associations. Yes, you guessed it right – fixed deposits and the principle of mutuality with respect to apartment complexes, gated communities and housing societies.
What Is Principle Of Mutuality?
You can get the exact legal definitions with just one Google search. We did the hard work for you and here is a simplified explanation of the Principle Of Mutuality.
When the contributor and benefactor of a certain sum of money are one and the same, the principle of mutuality is applicable. Owing to this doctrine, such an amount does not come under the purview of income tax. Therefore, the maintenance collected by apartment associations does not come under taxable income. Please do not confuse this with the application of GST on maintenance charges paid by the owner/resident to the management committee or Resident Welfare Association. However, in India, if a fixed deposit investment is made, the interest collected on the deposits do not come under the ambit of principle of mutuality.
Why is that?
Fixed deposits in the banking industry make for easy and attractive financial investment with their interest rates. However, the principle submitted to the bank is often used to loan out money to other customers. Since, it defies the concept of contributor and benefactor being the one and the same party, interests gathered on fixed deposits are subject to income tax.
To understand this better, you can read our blog and the relevant cases presented in the Indian courts here.
When Does The Doctrine Of Mutuality Not Apply?
The income generated from a contributor who is not part of the said apartment complex, gated community or housing society cannot be tax exempt under the doctrine. It is then considered as added income and a profit over the income of the management committee or RWA. Therefore, for instance :
If the roof or any part of the property is rented out to a third party for the installation of cellphone towers or commercial services, the income generated as rental charges, is taxable.
Section 2(24) Clause (vii) of the Income Tax Act 1961 gives a detailed idea of the incomes that are taxable for a residential community.
Similarly, unless exempted from Section 80P of the Income Tax Act, 1961, all interests accrued from any financial policy also does not fall under the purview of this doctrine.
Parking charges from non members are again categorised as taxable income.
What Can Come Under The Principle Of Mutuality?
Following is a list of income for a Management Committee or Resident Welfare Association that are not taxable according to the Principle Of Mutuality :
- Transfer Fee for the transfer of a unit in the community.
- Non – occupancy charges from community members.
- Cumulative maintenance charges collected from all units.
- Earnings from interest in co-operative banks.
- Rental charges and parking charges from members.
It is always wise for a brand new Management Committee or Residents’ Welfare Association to consult a trusted financial advisor and a tax lawyer to clarify all taxes to be paid by residential communities. This first discussion goes a long way to frame your financial policies for the community even in the long run.