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I plan to sell my under-construction flat, reinvest the proceeds into buying another property. How will tax be calculated?

I plan to sell my under-construction flat, reinvest the proceeds into buying another property. How will tax be calculated?

The new residential property must be acquired within two years from the date of sale of the under-construction property.

Teena Jain Kaushal
Teena Jain Kaushal
  • Updated Jan 29, 2025 12:38 PM IST
I plan to sell my under-construction flat, reinvest the proceeds into buying another property. How will tax be calculated?How will tax be calculated if I sell my under-construction flat and buy another property?

I plan to reinvest the proceeds from the sale of my under-construction property into purchasing another residential property. How will the tax be calculated, considering that three years have not yet passed since the agreement date?

I entered into an agreement to purchase an under-construction flat on November 6, 2022, and have paid a substantial amount. I have now decided to sell the flat, though the building is not yet fully completed. I have not paid stamp duty or registration charges, nor have I taken possession of the flat. I am a salaried individual in the highest tax bracket and plan to reinvest the sale proceeds in another residential property. In this regard, how will the tax be calculated, given that three years have not passed since the date of the agreement? Will it be treated as short-term or long-term capital gains? If I invest in another property, can I avoid paying tax altogether?

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Reply by Balwant Jain, tax expert

In my opinion, by paying for an under-construction property, what you acquire is the right to obtain the property, which is distinct from ownership of a residential property. The cost of acquiring this right is the total amount agreed upon in the contract. The fact that the entire sum was not paid upfront is immaterial. If the property is sold before taking possession, the gains will be classified as capital gains. The acquisition cost of this right is the total contracted price, reduced by the outstanding amount on the flat.

Since the holding period for most asset classes (except listed securities) has been uniformly set at 24 months, effective July 23, 2024, assets other than listed securities become long-term after 24 months. Previously, this requirement was 36 months. As per the amendment in Budget 2024, if you sell this right after holding it for more than 24 months, the gains will be treated as long-term capital gains and taxed at a flat 12.5% if no exemption is claimed.

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Since you are selling the right to acquire a residential property rather than the property itself, you can claim an exemption under Section 54F, not Section 54. This means you must reinvest the entire net consideration received from the sale of the under-construction property. However, if you sell the property after taking possession, your right to acquire the flat converts into ownership of the flat. In this case, you would be eligible for an exemption under Section 54 and would need to reinvest only the capital gains (i.e., the difference between the sale price and your cost) in another residential house.

In both cases, the new residential property must be acquired within two years from the date of sale of the under-construction property. If you opt for an under-construction property, the construction must be completed within three years. Any unutilized amount by the due date of filing your ITR must be deposited in a capital gains account with a bank. The deposited amount can be used to acquire the new residential property within the prescribed period.

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(Views expressed by the tax/investment 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.)

Published on: Jan 29, 2025 12:38 PM IST
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