Thursday, November 16, 2023

Capital Gains on Under-Construction Property Sales

Embarking on the journey of understanding capital gains taxation in the realm of real estate, specifically when dealing with the sale of under-construction properties, is akin to navigating a complex labyrinth. Let's embark on a detailed exploration to demystify the intricacies and shed light on the crucial aspects that shape the tax implications of capital gains in this unique scenario.


Real estate transactions often involve a dance between developers and buyers, with commitments made long before the actual completion of construction. Buyers dutifully make advance payments at various stages, patiently awaiting possession after a considerable period. However, when the decision is made to transfer property rights during construction or after possession, questions arise regarding the nature of resulting gains—whether short-term or long-term. At the heart of this inquiry lies the critical determination of the date when rights in the property are considered acquired.

  1. Date of Acquisition of Rights:

    • The acquisition of property rights hinges on the issuance of an allotment letter by the developer.
    • Initial advance payments, lacking a commitment, may not solidify acquisition.
    • Concrete acquisition occurs when the developer issues an allotment letter, providing clarity on project details.
  2. Nature of Gain during Construction:

    • When a buyer decides to transfer property rights during construction, before possession, the resulting gain is deemed a capital asset.
    • The classification of the gain as short-term or long-term depends on the duration of holding.
  3. Date of Possession and Capital Gain:

    • A common query arises regarding whether the period preceding possession should be considered for determining the nature of capital gains.
    • Arguments surface, suggesting that rights in the property represent a capital asset of a different nature than the property itself.
    • The counter-argument posits that possession is a continuum of holding rights, not constituting a transfer as defined in the Income Tax Act.

Embarking on a Real-Life Case:

Preface: Imagine an individual who booked a flat with a builder in 2007, receiving the allotment letter on the same date. The total agreement value for the flat is Rs. 42,16,000, paid in ten installments spread over the financial years 2007-08 and 2008-09. Additional expenses, including stamp duty, registration fees, and a society deposit, amount to Rs. 3,94,150. The property's possession was obtained on 25.03.2011, and the flat was subsequently sold on 07.07.2011 for Rs. 1,00,80,000.

Insights into Key Questions:

  1. Is the Right to Own the Property a Capital Asset?

    • According to the Bombay High Court, any right that can be termed as property falls within the definition of a capital asset.
    • The allotment letter issued by the builder establishes the buyer's right as a recognized asset.
  2. Short Term or Long Term Gain on Sale of Flat?

    • The categorization of gains as short-term or long-term is contingent on the holding period of the asset.
    • An asset held for a period exceeding 36 months (24 months post A.Y. 2017-18) is considered a long-term asset.
    • In the given case, the allotment date is in 2007, making the holding period well beyond the stipulated 36 months.
  3. Indexation for Long-Term Gain:

    • Mumbai Tribunal's decision suggests that indexation should be applied based on the allotment year for the flat and the payment years for additional expenses.
    • Other expenses related to the purchase of the property should be indexed based on the respective payment years.
  4. Tax Saving Options for Gain on Sale:

    • Section 54:

      • Conditions include being an individual/HUF, investing in residential property, and treating the property as a long-term asset.
      • The buyer must purchase or construct a residential house within specified timelines.
      • Unutilized investment amounts can be deposited in a capital gains account for later use.
    • Section 54EC:

      • Conditions for eligibility include capital gains arising from a long-term asset.
      • Investment in specified bonds within six months, with a minimum holding period (3/5 years post 01.04.2018).
      • Exemption available up to Rs. 50 lakhs.

In Conclusion: Understanding the intricacies of capital gains on the sale of under-construction properties is pivotal for individuals navigating the real estate landscape. As the legal landscape evolves, staying informed about tax implications becomes paramount. This journey through the case and its implications offers valuable insights for individuals treading the path of property transactions in the ever-dynamic real estate market. Stay tuned for more in-depth explorations into the intersection of real estate and taxation.