Brij Lal Dhiman 

We understand that the individual chose the option to subscribe to the rights issue of a PSU bank. As a result of the technical problem from the bank’s end, the application did not go through. Hence, we understand that this prevented the individual from being an applicant in the rights issue. The bank has decided to compensate the individual with a certain amount on account of the technical glitch on their part.

Taxability of compensation received is usually a contentious issue under the Income-tax Act,1961 (“The Act”). While this sort of a receipt is not clearly defined under the Act, generally only capital receipts, specifically excluded from meaning of total income, are not taxable.

Also read: Tax Query: Tax implication for NRI selling inherited share of flat to brother

The rights available to an individual is treated as an asset and usually where such rights are transferred, such a transaction would be treated a transfer of a capital asset. However, in the current case, we understand the rights could not be exercised and therefore would not involve a capital asset as such. Therefore, on a prudent basis, the compensation received from the bank may be considered taxable and could form part of your total income and be taxed at the applicable slab rates under the head, ‘income from other sources’.

The writer is a Partner with BDO India LLP

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