The tax treatment of a forfeited advance deposit (Pagri) depends on the circumstances under which it is received. Below are different scenarios and their tax implications under the Income Tax Act, 1961:

1. Forfeited Advance on Sale of Property (Section 56(2)(ix))

• If a seller receives an advance payment from a buyer for the sale of property and later forfeits it due to non-completion of the transaction, the forfeited amount is taxable as “Income from Other Sources.”
• No deduction or cost adjustment is allowed in respect of such forfeited amount against the cost of acquisition of the property.

2. Pagri Received by Landlord from Tenant

• If a landlord receives Pagri (premium or goodwill) from a tenant in connection with letting out a property, it is taxable under “Income from House Property” or “Income from Other Sources” depending on the nature of the transaction.
• If the Pagri is in the nature of capital receipt (one-time non-refundable amount), it may not be taxable immediately but could impact capital gains tax when the property is sold.

3. Pagri Received by an Existing Tenant

• If a tenant receives Pagri from a new incoming tenant in exchange for vacating the premises, it is taxable as Capital Gains under “Income from Capital Gains.”
• The amount is taxed as Long-Term Capital Gain (LTCG) if the tenant occupied the property for more than 3 years; otherwise, it is taxed as Short-Term Capital Gain (STCG).

4. Advance Deposit for Rent, Later Forfeited

• If a landlord receives an advance rent deposit from a tenant and later forfeits it (for example, due to non-payment of rent or breach of contract), the amount is taxable as “Income from Other Sources.”

Conclusion

The taxability of a forfeited advance deposit or Pagri depends on who receives it and under what circumstances. If it is received by a seller of a property, it is taxed as “Income from Other Sources.” If received by a tenant, it is taxed under “Capital Gains.” If received by a landlord in connection with rent, it is taxed under “Income from House Property” or “Other Sources.”