Capital Gains on sale of Property before possession

By Hiral Vakil on February 12, 2020

We have been getting queries regarding the Capital Gains Tax liability in case of sale of a property still under construction. The situation is very common when you have booked a property and before taking the possession, you wish to sell the same.

Let’s understand the situation first: You have booked a property which is still under construction. So essentially you have acquired the rights for the under construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do i calculate the capital gains for the same and what would be my tax liability?

So let’s try to understand that with the help of a scenario:

Darshil paid Rs. 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. Taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under construction property. To determine the same let’s have a look at the following situations:

  1. If Darshil transfers the rights before 01/01/2015
    • than it will result into short term capital gains since the holding period is less than 36 months.
    • Indexation benefit will not be allowed
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no exemption is available to save the capital gains tax.
  2. If Darshil transfers the rights after 01/01/2015
    • Than it will result into long term capital gains since the holding period is more than 36 months
    • Indexation benefit will be allowed on the amount paid to the builder, stamp duty and also the registration fees.
    • The capital gains will be taxable @ 20%
    • Since it will be long term capital gains, exemption under section 54F and 54EC will be available. Read this guide to know more about the exemptions on capital gains
    • You can not claim the exemption under section 54 because the exemption is for purchase of new residential property against sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and may result in scrutiny.