How To Determine Capital Gains From Selling An Under-Construction Property?
Updated: 28-01-2025 at 6:26 AM
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Property investment is one of those decisions that require a lot of time, thought and money. It is a decision which 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 judgements in different cases. In the end, it is tricky.
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. 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.
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 the 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 re-iterated these same techniques.
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 is 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
Case Where Construction Is Not Completed In Three Years
The Income Tax Act itself is not very clear in the case if the house 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 about Sect 54 and 54F even if the construction is not complete within 3 years of buying the “house”.
Conclusion
In the judgments on this issue, either the date of allotment or the date of possession was considered to be the date of possession. However, it is always advantageous for an investor if the date of allotment is considered as the date of holding as it gives him advantages like indexation charges, exemption under section 54 etc.
For queries, contact an Income Tax official at 18001801961 or 1961 or read more on the Income Tax Website.
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