What are capital gains in the context of selling an under-construction property?

Capital gains refer to the profit earned from the sale of an asset, such as an under-construction property.

How do I calculate short-term capital gains (STCG) on an under-construction property?

Short-term capital gains are applicable if the property is sold within three years of purchase.

What is Section 54F for under-construction flat?

Section 54F allows exemption on capital gains if the entire sale proceeds are invested in purchasing or constructing a single residential house within the specified time.

Can you sell a house while under construction?

Yes, you can sell it by transferring your rights to a new buyer, but you may need the developer’s consent and may incur transfer charges.

Can I sell an under-construction house?

Yes, you can sell an under-construction property by transferring the property rights through an assignment or transfer agreement, subject to builder terms.

What is the LTCG period for under-construction property?

The long-term capital gain period is 24 months from the date of allotment or purchase agreement for an under-construction property.

How to avoid capital gain tax on sale of property?

You can save capital gains tax by reinvesting in another residential property under Sections 54/54F or investing the gains in Capital Gains Bonds under Section 54EC.

Why should you sell under-construction properties?

Selling early can offer better returns due to property value appreciation and allows sellers to exit projects facing delays or financial needs.

Is it a good idea to buy under-construction property?

Yes, it often provides lower prices and flexible payments, but carries risks like delays, changes in project quality, and regulatory issues.

Is it possible to sell an unfinished house?

Yes, an unfinished house can be sold, either as-is or by transferring ownership rights, but the price may be lower due to incomplete construction.

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How To Determine Capital Gains From Selling An Under-Construction Property?

Komal Bajpai

Author

Updated: 20-11-2025 at 3:30 PM

Capital Gains On Underconstruction Property

Property investment is one of those decisions that requires a lot of time, thought, and money. It is a decision that one makes out of one’s necessity, desire, or greed. One of the aspects of Income Tax only drawing a lot of attention and a lot of debate is capital gains on the sale of property. The difference of opinion has led to different court judgments in different cases. In the end, it is tricky.

Read the article to learn about Section 54 as laid down in Section 54 of the Income Tax Act, including information on Section 54EC of Income Tax Act and Section 54B of Income Tax Act

What Is Section 54 Of The Income Tax Act?

This is the part of the Income Tax Act regarding the exemptions availed on the sale of house property. The capital gains obtained from the sale both be re-invested either in the purchase or the construction of one or two house properties. The exemption of two houses was introduced in the Budget 2019; before that, the exemption was 1 house.

The purpose of keeping the exemptions under u/s 54 is mainly to encourage individuals to either buy or construct houses as mentioned in the Section 54 of the income tax act 1961 pdf. However, one of the conditions laid down in this section is that the house is bought through the capital gains, and it is to be built or is under construction, and the same has to be completed within 3 years of the investment being made.

This is in case the flat is under construction on purchase, and in case the buyer is to construct a house on a plot purchased.

Also read: 20 Easy Ways to Save Income Tax in 2024

Holding Period For Under-Construction Property

The holding period is an important component in the calculation of capital gains tax. As there is a certain ambiguity in this regard in the Income Tax Act regarding the calculation of the holding period for the sale of under-construction property, more details have recently become clear.

The Mumbai bench of ITAT adopted this position in the April 2, 2019, case of Assistant Commissioner of Income Tax vs. Keyur Hemant Shah.

Case Studies

Keyur Hemant Shah sold his property on April 4, 2012, and the Long-Term Capital Gain (LTCG) was calculated based on the indexed cost of acquisition.

In this manner, under Section 54F of Income Tax Act, a deduction was taken and LTCG was reduced still further. It was discovered by the officer that Shah bought the flat through a Registered Agreement for Sale in March 2010. Therefore, Shah’s period of holding it came to less than 36 months.

Therefore, the consequences of it should be dealt with as short-term capital gains. Shah pointed out that the flat was bought through an Allotment Letter on February 26, 2008, and had considerable payments paid by July 24, 2008, by submitting his defence.

Thus, with a resultant period of holding of more than 36 months.

The ruling came from the Income Tax Appellate Tribunal, the Bombay High Court, in the case of PCIT Vs. Vembu Vaidyanathan [ITA No. 1459 of 2016], held in January 2019, that the date of allotment was to be treated as the date of acquisition. The ITAT skillfully reiterated these same techniques.

Section 54 of Income Tax Act with example:- Chethan books a flat on 5th June 2016, and he pays the booking amount on the same day. The builder grants the letter of allotment on that same day. An agreement to sell was made by Chethan with the builder on 7th July 2016. Chethan sold the property under construction to Mr Darwin on 25th August 2019. The length of time of holding here is based on the date of the letter of allotment, or on 5th June 2016

Also read: Income Tax On Credit Card Transactions: Strategies To Avoid A Tax Notice

Case Where Construction Is Not Completed In Three Years

The Income Tax Act itself is not very clear in the case of a house that is not completed within 3 years. The Limitation Act is to work in this case. Now “house” stands for the house which was bought out of the process of receiving capital gains. Legal precedent has it that one can avail of LTCG [Long Term Capital Gain] exemption for houses bought from LTCG under Section 54 of the Income Tax Act 1961 and 54F, even if the construction is not complete within 3 years of buying the “house”.

Types Of Properties Eligible For Section 54 Exemption

Types of properties that are eligible for the Section 54 exemption are mentioned below for one’s reference:

Residential properties
Capital gain must be invested in another residential house in India.
New property can be purchased or constructed within the prescribed time limit.

Conditions & Limits Of Section 54 Exemption

Conditions and limits of Section 54 exemption that must be kept in mind are written below in brief points:

Taxpayers must be an individual or a Hindu Undivided Family (HUF).
The old residential property must be held for at least 24 months.
A new house should be purchased within a year or 2 years after the sale, or should be constructed within 3 years after the sale.
Exemption is limited to the amount of capital gain invested in the new house.
Exemption can be claimed for investment in 2 residential houses if the capital is equal to or more than Rs. 2 crore, only once.

What Are The Documents Required For The Section 54 exemption?

There is a list of documents that are required to be attached while applying for the Section 54 exemption. The list of those documents is as follows:

Agreement related to properties
Payment receipts
Capital gain calculation statement
Registry document
Building plan (if needed)
PAN card and property-related financial records

Conclusion

Taxation of capital gains, especially under Section 54, is essential yet complex at the same time for making property-related decisions in India. Taxpayers are advised to stay updated with all the relevant guidelines to be able to determine their eligibility for various exemptions, like the Section 54 exemptions. The purpose of this section is clear, and that is to promote housing development and ensure that the capital gains are going back to the real estate sector for economic growth.

We request all of you, especially those who are planning to sell or reinvest in a residential property, to keep yourself educated about all the relevant tax-related sections, as one can only benefit from them when one knows about them!

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