I entered into an agreement to purchase an under-construction flat on 6 May 2022. The building has just been completed. I have decided to sell that flat now before taking possession. How will the tax be calculated in such a case? Will it still be treated as short-term capital gain though two years have already passed since the date of the agreement? Can I save tax if I invest in another residential property?
Reply by: Balwant Jain, a tax expert
In my opinion, by paying for an under-construction property, you get a right to get the “property” which is distinct from the right in the property itself.
If the property is sold before taking possession, any profit made would be treated as capital gains. Capital gains will be long-term if you transfer this right within 24 months otherwise, it will be short-term capital gains. The cost of acquisition of this right is the total agreement value as reduced by the amount outstanding on the flat if any.
If you sell it after taking possession your right to get a flat gets converted into a right in the flat. The period for computing the holding period starts once again from the date of your taking possession though there are differences of opinion on this count as some of the Income Tax Tribunals have taken the stand that if the unit is identifiable the date of acquisition will be the date of allotment issued by the builder. The cost of acquisition is the total payments made to the builder including stamp duty and registration charges.
Yes, you can claim an exemption under section 54F on long-term capital gains by investing the net sales proceeds to buy another residential property within 2 years from the date of transfer. If you do not invest the total sales proceeds the exemption available will be reduced proportionately. In case you go for an under-construction property or self-construction, you get an extended period of three years from the date of sale of the property. Please note that in case the money is not fully utilised before the due date of filing of your ITR i.e. generally 31st July 2025, you will have to deposit the unutilised money in a capital gains account to be opened with a scheduled bank. This money can be utilised to acquire the property or for paying the developer as the case may be. The acquisition/construction has to be completed within the period stipulated.
In case you do not want to invest in another residential house property, you have the option to pay tax either at 12.50% on the difference between the sale price and your cost or at a flat rate of 20% on the difference between the sale price and indexed cost provided you are a resident taxpayer.
(Views expressed by the expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts)