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Archive / Investment Adviser (Level 2) / Income from Other Sources
nism-series-xb-section-56-2-ix-forfeited-advance-money-real-estate[ INVESTMENT ADVISER (LEVEL 2) ]

Under Section 56(2)(ix) of the Income Tax Act, how is advance token money forfeited by a seller during failed real estate property negotiations taxed?

[ A ]Taxable entirely as 'Income from Other Sources' in the seller's hands in the financial year of forfeiture (and NOT deducted from the cost of acquisition upon future sale).[ CORRECT ]
[ B ]Deducted from the cost of acquisition of the property (Pre-2014 legacy rule).
[ C ]100% tax-free windfall gain.
[ D ]Taxed as agricultural income.
Takeaway

The correct answer is A: since Finance Act 2014, advance money forfeited on a failed property sale is taxed entirely as Income from Other Sources in the seller's hands in the year of forfeiture, and can no longer be netted against the property's cost of acquisition.

Derivation
Prior to April 1, 2014, forfeited advances were simply deducted from the property's cost of acquisition under Section 51, deferring any tax impact until the eventual sale. Finance Act 2014 introduced Section 56(2)(ix) to tax the forfeited amount immediately, in the year of forfeiture, under 'Income from Other Sources' -- closing the deferral loophole and ensuring the seller is taxed promptly rather than potentially never (if the property is later gifted or inherited rather than sold). The specific trap is candidates applying the old pre-2014 cost-reduction rule to a post-2014 fact pattern.
Why the others fail
B — Deducted from the cost of acquisition of the property (Pre-2014 legacy rule).
Applies the pre-2014 rule; Finance Act 2014 replaced cost-of-acquisition reduction with immediate Section 56(2)(ix) taxation for post-2014 forfeitures.
C — 100% tax-free windfall gain.
Incorrect; forfeited advance money is explicitly taxable under Section 56(2)(ix), not a tax-free windfall.
D — Taxed as agricultural income.
Fabricated and irrelevant; forfeited real estate token money has no connection to the agricultural income classification.