One of the million dollar questions is today’s topic i.e. How to calculate capital gain for Under-Construction Property :). Lack of clarity in income tax act is responsible for numerous interpretations available online. The seller gets confused and left high & dry. In my post, Register under-construction property for a home loan, i shared my opinion as a buyer. In other words, i shared negatives of registering under-construction property. If i consider myself as a seller, the biggest advantage is that i can save on capital gain if i register under-construction property.
The seller can take advantage of the fact that the Income Tax Act is silent whether to consider the date of property registration or date of possession to calculate capital gain :). A general practice is to consider the one that is beneficial for a taxpayer. I am not finding a loophole in the Income Tax Act but if there exists one then nothing wrong to take advantage of the same within the framework.
Just to caution reader’s that normally, Income Tax department consider the date of possession. Here physical possession of property or possession letter from builder will not suffice. The reason being, it is observed that builder issue possession letter or offer possession for incomplete projects in a rush to collect balance payment from the buyer. Income Tax department considers the date on which the property is assessed to property tax by the municipal corporation / committee as the date of possession. If we go by this logic then there is no scope to save capital until unless you sell the property before receiving possession.
To clarify if you are registering the property at the time of possession then this is not a useful post for you. This post is specific to cases wherein buyer register the under-construction property much before physical possession. The benefits are more in the case of possession linked payment plan compared to construction linked payment plan. In possession linked payment plan, a buyer releases almost 80% of the consideration value in advance. Thus, can save a lot of capital gain tax. As most of the buyers/banks prefer construction linked payment plan, therefore, i am considering the same in my post. Let’s discuss how can you calculate and save capital gain tax in such cases.
Under-Construction Property – How To Calculate & SAVE Capital Gain
Let’s assume i bought an under-construction property and payment plan was linked to the construction. The builder and bank either forced me or i voluntarily registered the under-construction property on 1st April 2012 i.e. immediately after the purchase, by making 20% payment as a booking amount on 1st Jan 2012. For the simplicity purpose, i paid 8% of property value on every 10% completion of the project. In such scenarios, the date of possession from the date of registration i.e. holding period is very crucial.
There can be multiple permutations and combinations in this case. If you sell before the date of possession then there is NO CONFUSION. If the holding period is more than 36 months then the capital gain is long-term capital gain otherwise it is short term capital gain.
The problem arises if you sell the property after date of possession i.e. date from which you start paying property tax. Assuming i take possession on 1st April 2016 i.e. 4 years from the date of registration. In other words, property tax assessment started from 1st April 2016. Further, I made 20% payment in each financial year i.e. FY 2011-12, FY 2012-13, FY 2013-14, FY 2014-15 and FY 2015-16. As i shared it is not clear whether to consider the date of registration or the date of possession as the date of acquisition to calculate capital gain. The question is what will be the date of acquisition in this case?
In my opinion (based on the decision of various income tax tribunals and ruling of Supreme Court of India), the date of acquisition in this example is 1st April 2012. The logic is that the buyer acquires the right to obtain a specific flat from the date of registration i.e. 1st April 2012 in this case. The possession is merely a formality in such cases. Secondly, according to the ruling of the Supreme Court of India, a sale deed or conveyance deed is the only valid mode of transfer of title of the property. The ruling does not state that sale/conveyance deed cannot be executed for the under-construction property.
Thus, i can take the advantage of indexation benefit against each installment paid during the particular FY. In other words, the cost of acquisition will be the sum total of acquisition cost calculated separately for each FY in which the payment was made. It will help me save the capital gain tax. Therefore, immediately after the purchase, the buyer should register the under-construction property. In the example mentioned above, for booking amount paid in FY 2011-12, you have to consider the FY 2012-13 for indexation purpose as you registered the property in FY 2012-13.
To clarify, in case the under-construction property is not registered, in layman terms, the date of allotment letter will be the date of acquisition for the under-construction property. In future, this date will reset to date of registration or date of possession as the case may be for the purpose of calculation of capital gain tax. In some many cases, i observed that the seller considered the date of allotment as the date of acquisition even after the property is registered in his/her name at the time of possession. It is wrong because the allotment letter does not define the property. Therefore, if the property is registered then the date of allotment cannot be the date of acquisition.
In one of the rulings, Mumbai Income Tax tribunal ruled that date of possession is not necessary in a similar case. This is based on the fact that even income tax department is not adopting a uniform approach. In some cases, the date of possession is considered as the date of acquisition. Whereas in other cases, they considered the date of registration as the date of acquisition.
Words of Wisdom:
If you are concerned about the future capital gain tax liability then you should register the under-construction property immediately after purchase. You can include this point in your basic checklist for Under construction project. Always remember that any miscalculation in this regard can have huge financial implication on the taxpayer.
To share an example of my colleague. He bought under-construction property on 5th May 2013 for 60L. He registered it on 20th May 2013. He received possession from the builder on 27th Mar 2016. Finally, he sold it on 26th July 2016 for 90L. His tax consultant advised him that capital gain is 30L (Short Term Capital gain). The tax consultant considered the date of possession as the date of acquisition. Thus, a short-term capital gain tax liability of approx 10L considering the highest income tax slab.
On the contrary, i suggested him to consider 5th May 2013 as the date of acquisition thus his capital gain is long-term in nature. In my opinion, he can take the indexation benefit. Therefore, by considering the capital gain as LTCG his capital gain tax liability reduced considerably.
This is the reason, i suggest readers handle their tax related matters on their own. You are the best judge and know all the micro details compared to a professional tax consultant :)
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