Capital Gains on Sale of Property before Possession

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Hiral Vakil

Capital Gains
Income from House Property

We have been getting queries regarding the Capital Gains Tax 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.

ITR Documents : Capital Gains
A taxpayer needs to have certain documents to calculate Capital Gains.
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ITR Documents : Capital Gains
A taxpayer needs to have certain documents to calculate Capital Gains.
Read More

The Situation of Capital Gains on Sale of Property before Possession

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?

Example

Darshil paid INR 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. The 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.

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Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • 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
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under section 54F and Section 54EC will be available.
    • You can not claim the exemption under section 54 because the exemption is for the purchase of new residential property against the 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.
ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
[Rated 4.8 stars by customers like you]
ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
[Rated 4.8 stars by customers like you]

FAQs

What is section 54F under capital gains?

Section 54F, exemption of capital gain is made available in the situation of long term capital assets transfer against the investment one makes in a residential house. he capital gain that arises for transferring any long term capital assets that is other than the residential house.

How can I save capital gains tax on the sale of my property?

By Investing in Capital Gains Account Scheme and while filing your return on Income Tax Portal you can claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.

How do you calculate long term capital gains on sale of property?

Long term capital gain is calculated as the difference between net sales consideration and indexed cost of the property. The benefit of indexation is allowed to set off the impact of inflation from gains made on the sale of the property so that the actual gains on the property will be taxed.

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