Your Housing Society vs the Taxman: What Every RWA Needs to Know

Query]

Will you please let me know the Income tax rules for a Resident Welfare Association (RWA) registered under the State Property Act? Whether return filing is compulsory for RWA? Whether any TDS & GST is required to be done by RWA? 

 

Opinion:

Ah, the mighty RWA — part society, part sansad (parliament), and part neighborhood gossip committee! From organizing Holi parties to fixing leaking pipes to debating CCTV angles like it’s a matter of national security — they do it all. But when it comes to taxes, things suddenly become less colorful and more…grey.

Many readers want to know regarding the taxation of the Resident Welfare Associations (RWAs) as urbanization has led to the formation of several associations—both permanent and temporary—managing residential complexes, events, or community welfare. The taxation framework that governs Resident Welfare Associations (RWAs) largely applies similarly to other mutual associations, clubs, and societies, whether registered or unregistered. Let’s demystify the topic, and walk you through everything from mutuality to mobile towers, GST to gully cricket fund.

A Resident Welfare Association (RWA) is typically formed by residents of a housing society to manage shared amenities like security, parking area, common facilities, water, etc. It may either be unregistered or may be registered under the Societies Registration Act, the State Apartment Act, or Trust Act. Whether it’s registered or just informally formed in a whatsapp group after a particularly long power cut, if it collects money and spends it, that’s exactly when the Income Tax Department starts taking notes & compliance becomes more than just a WhatsApp discussion.

Mutuality — No Profit from Yourself!

This is the golden rule for taxation of RWAs and similar associations. The principle of mutuality says “You can’t earn income from yourself”. If all the contributors to a common pool are also the beneficiaries — like residents of a society contributing for maintenance — then the “income” is not really income in the eyes of tax law. It’s just cost-sharing like chipping in for pizza at a friend’s party.

What’s Exempt Under Mutuality:

• Monthly maintenance from members
• Security, water, parking, and electricity charges from members
• Sinking fund contributions
• Festival fund as long as members are the only contributors.

What Triggers Tax Liability:

• Interest earned on bank deposits — even if it’s from member funds
• Rent from outsiders (like mobile towers, Hoarding or canteens leased to vendors)
• Event sponsorships from non-members or ads on society notice boards
• Clubhouse rentals to outsiders.

Common Misconception: Interest Income or receipt from outsider is Exempt?

No, it’s not! This is where many RWAs (and even their accountants) slip up. While contributions from members are exempt under mutuality, interest earned on deposits in banks or other receipts from outsiders is taxable. It’s because the banks & outsiders are not the members of the RWA. The Supreme Court in Bangalore Club v. CIT (2013) 350 ITR 509 (SC) made this crystal clear. So, if RWA has surplus funds lying in fixed deposits earning 7% interest — that interest is taxable as “Income from Other Sources.” In such a case, the RWA must file the return and pay the tax. If say RWA collects ₹ 9 lakhs a year out of which ₹ 5 lakh is from members and ₹ 4 Lakh is bank interest & receipt from outsiders then this ₹4 Lakh will be taxable.

Does an RWA Need to File Income Tax Returns?

Yes, if the taxable income (i.e., income not covered by mutuality) exceeds ₹2.5 lakh if under Old Tax Regime or ₹3 Lakh if under New Tax Regime in a financial year. Even if no tax is due but TDS is there, it’s a good idea to file returns. RWAs can file the ITR-5, under the category of Association of Persons (AOP).

Is TDS Applicable to RWAs?

Yes. RWAs are like any other person in the eyes of TDS law.

• If you pay a contractor more than ₹30,000 a year against a single bill or ₹1 Lakh in aggregate during the year, you may need to deduct TDS @1% under Section 194C.
• If you hire a professional (auditor, lawyer), TDS @10% under Section 194J may apply.

Don’t forget to pay & issue TDS certificates in such cases.

What About GST?

Here’s the quick version:

• If monthly maintenance charged per member exceeds ₹ 7,500 and your annual collection exceeds ₹ 20 lakh, then GST is applicable.
• Below that? You’re safe (for now).

Also remember: GST is not exempt just because the money is for society welfare. Even cleaning the common staircase may come with a tax sweep.

What About Unregistered Associations or Temporary Event Groups?

Here’s the good news:
1. Unregistered associations are perfectly allowed under income tax law.

2. They can obtain a PAN, open a bank account, and comply with TDS or GSTobligations just like registered ones.

3. The Income Tax Act recognizes such bodies under AOP (Association of Persons)or BOI (Body of Individuals). So your local Ganesh Mandal or Diwali celebration committee can breathe easy — as long as their activities are for mutual benefit and not-for-profit.

4. Contrary to earlier myths, there’s no legal or practical hurdlein PAN allotment, return filing, or even TDS/GST registration for such informal groups.

What About Clubs and Societies?

The same mutuality principle applies but beware, clubs often venture into non-mutual territory:

• Serving outsiders in the restaurant or bar? Taxable.
• Sponsorship income from companies? Taxable.
• Interest from bank deposits? Still taxable.

A club that’s all members and no outsiders is safer. But once you open up your swimming pool, Zumba classes, etc for the public, such receipt may be taxable.

Conclusion

Resident Welfare Associations and similar mutual bodies play a vital role in community management. While the mutuality principle offers substantial relief from taxation, it’s not a blanket exemption. Income from non-members, interest, or commercial activity is taxable. Whether temporary or permanent, registered or not, all associations must ensure financial and tax discipline. Mutuality is your friend — but only if you stay within its circle. The moment an outsider pays you, or you earn interest, you’re in taxable territory. Always file returns if taxable income exceeds ₹ 2.5 lakh or ₹ 3 Lakh, even if you’re a non-profit body. TDS, GST and PAN rules apply equally to both registered and unregistered associations.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]