Is Security Deposit Taxable?

No, a refundable security deposit is not taxable when it is received.

But there’s a catch. Actually, a couple of them.

Why security deposit is usually not taxed

A security deposit is not income.

It is money held in trust.

The landlord keeps it only as protection. For damage. For unpaid rent. For safety. The intention is to return it at the end of the lease.

Because of that, tax laws generally do not treat refundable security deposits as income at the time of receipt.

No income. No tax.

What makes something taxable in the first place

Tax is charged on income earned, not money held temporarily.

Security deposit fails that test.

It sits there. It waits. It doesn’t belong to the landlord in the true sense. Not yet.

That’s why it stays outside tax when received.

An example

Monthly rent: ₹30,000

Security deposit: ₹90,000

The ₹90,000 is paid upfront and kept till the tenant moves out.

At this stage:

• It is not rent
• It is not profit
• It is not taxable income

It’s just parked money.

When security deposit can become taxable

Here’s where people get confused.

A security deposit becomes taxable only when it stops being refundable.

That happens in cases like:

• Deposit adjusted against unpaid rent
• Deposit used to cover damages
• Deposit forfeited due to agreement breach

Once adjusted or forfeited, that amount becomes income.

And income is taxable.

Timing matters here.

Tax treatment depends on usage, not name

Quick tip. Labels don’t matter as much as usage.

Even if the agreement calls it “security deposit,” tax depends on what finally happens to the money.

If returned → not taxable

If adjusted or kept → taxable in that year

Simple logic. Often missed.

Does interest on security deposit get taxed?

Interest is a different story.

If interest is paid on the deposit, that interest is taxable as income under income tax laws.

The deposit itself stays non-taxable.

The interest earned on it does not.

Two parts. Two treatments.

That difference causes most confusion.

What about GST on security deposit?

Refundable security deposits are not subject to GST.

GST applies to supply of goods or services.

A refundable deposit is neither.

However, if any part of the deposit is later adjusted as rent or penalty, GST may apply to that adjusted amount.

Again, usage decides tax.

Common mistakes people make

These show up often:

• Treating deposit as income immediately
• Ignoring tax when deposit is forfeited
• Mixing GST rules with income tax rules

Different laws. Different logic. Same money.

That’s where things go sideways.

What rental agreements should clearly say

Good agreements make tax treatment obvious.

Look for clarity on:

• Refundability of deposit
• Conditions for deduction
• Adjustment clauses
• Interest terms, if any

Clear words now prevent tax confusion later.

FAQ

Is security deposit taxable when received?

No, if it is refundable.

Is forfeited security deposit taxable?

Yes, in the year it is forfeited.

Is interest on security deposit taxable?

Yes, interest is taxable as income.

In short

Refundable security deposit is not taxable.

It becomes taxable only if kept or adjusted.

Interest follows a different rule.

Still unsure how a specific deposit is treated in an agreement?