After my article on taxation of Inherited properties a few of the readers have asked me to write on taxation aspect of an under construction property. Let us discuss the subject under various scenarios.

Tax on Sale of under construction Property before taking possession:

In case you sale a property booked by you before you you take the possession, the profits made on such sale will depend on the time interval between your date of booking the property and the date of agreement to transfer your right in the under construction property. In case the interval is not more than 24 months, the profits so made shall be treated as short term capital gains and shall be added to your regular income and taxed at the slab rate applicable.

However in case the interval is more than 24 months , the difference shall be treated as long term capital gains. The cost for the purpose of capital gains shall include the amounts paid by you to the builder over the period as well as the stamp duty and registration charges. Since you are selling a long term capital asset, you will be entitled to take the benefit of indexation on the amounts paid to the builder as well as registration and stamp duty. The benefit of indexation shall be available in respect of the each payment made. It may be also interesting to note that since the capital gains are long term in nature, you can avail the befits of exemptions available for investing in another house under Section 54F. You can also avail the exemption by investing your capital gains in bonds under Section 54EC. Please note that for claiming the benefit of exemption you will have to invest the net consideration for purchase or construction of another house and not the capital gains as required under Section 54. This is so because what you are selling is a right to acquire a residential house and not the residential house itself. People treat the sale of an under construction flat at par with a residential house for the purpose of claiming long term capital gains exemption which is incorrect and may result in litigation and substantial tax demand, interest and penalty.

Tax on Sale of under construction after taking possession

The present income tax law does not have any clear cut provision to deal with such situation, however the tax treatment in such case will depend on the facts of the case as applicable. In case the property is sold after taking possession the period of holding shall be reckoned from the date of possession and not from the date of booking of the property. Please note these are two separate capital assets involved. What you hold till you take the possession is the right to acquire the residential house property and after possession the above capital asset gets converted into a full fledged residential house. So in case you sell the residential property within a period not exceeding 24 months after taking possession of the same, any profit made on such transfer shall be treated as short term capital gains and shall be taxed at the slab rate applicable to you. Moreover you will not be entitled to avail any exemption whether be it under Section 54 or be it under section 54EC as the capital gains made by you are treated as short term long term in nature.

Since there is no clear cut provision for combining the holding period of both the assets under the present income tax laws unlike which is provided for property received under gift or inheritance or shares received under certain circumstances both the holding period shall be treated separately and though the time interval between the date of booking of the property and its sale is more than 24 months , the profit shall still be treated as short term due to the reasons explained above.

Moreover the law does not provide that the taking over of possession shall not be treated as transfer, both the assets shall be treated as separate assets and thus the question of treating the right of acquiring an under construction and ownership of a ready residential property as one and the same does not arise.

The author is a CA, CS and CFPCM and He can be reached at jainbalwant@gmail.com and  @jainbalwant

(Republished With Amendments)

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Qualification: CA in Job / Business
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Location: mumbai, Maharashtra, IN
Member Since: 20 May 2018 | Total Posts: 66

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4 responses to “Tax on sale of under construction property”

  1. s.pattabiraman says:

    dear sir,
    one aspect that requires consideration is the inclusion of interest during construction on borrowings as an element of cost for the determination of the capital gain

  2. hitesh says:

    In case of long term capital gain on property sold before possession, how is indexation to be computed? Some payments made before possession may not be 36 months old. Is the indexation benefit available on these payments as well?

  3. prem bafana says:

    Sir

    I beg to differ. One can not carry out a transaction with one self and accordingly if i have a right the same stand converted into possession of property and the period shall be combined. That is equity and would stand any test of judiciary

  4. KRISHAN says:

    Dear Sir,
    Your article is very interesting and informative. However, a question comes in my mind in such case why the service tax is being charged by builders during construction while the service will be complete only after the construction is over and unit is ready for handing over the possession? is it not?
    Thanks in advance kindly respond.

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