Five years back, when I bought the house, it was for just Rs.25 lakh. I sold it just last month for Rs.60 lakh, and it’s not even finished yet.” This and many other similar conversations are common. In this particular case, acquisition price of Rs.25 lakh and a sale price of Rs.60 lakh should mean a profit of Rs.35 lakh, right? No, because, besides interest paid on home loan, we tend to ignore taxes on the gain. However, the taxes are significant, and the dates based on which they are calculated play a big role in how much tax has to be paid, especially in the case of an under-construction property.
There are various things to be considered—date of booking, date of signing the builder-buyer agreement, date of allotment, periodic payments, date of possession and much more. Here’s how to factor in all these.
Matter of ownership
When you buy a completed or ready-to-move in house, you get possession immediately. But with a house that’s being built, you only possess the right to own the asset and not the physical asset. Date of ‘ownership’ will determine if the property (or right over it) was held for 36 months or lesser. If the holding was for lesser than 36 months, any gain on sale would be considered short-term capital gain and get taxed at marginal rate applicable to seller. If held for longer, gains become long-term capital gains (LTCG), which are taxed at 20%, but after calculating the indexed cost of property acquisition.
“The term capital asset is defined under section 2(14) of the Income tax Act, 1961, and includes property of any kind held by an assessee whether or not connected with her business or profession,” said Kuldip Kumar, partner-personal tax, PwC. “Section 2(47) clarifies that transfer in relation to a capital asset includes extinguishment of any rights and disposing of or parting with an asset or any interest therein directly or indirectly,” he added. So, when you buy an under-construction property, your right to own the property upon completion is considered as the capital asset, and “capital gain rules will apply on sale of such property,” said Divya Baweja, partner, Deloitte Haskins & Sells LLP.
Before possession: If you sell a house before taking possession, you actually transfer your right of acquisition. So, capital gains will depend on the time of acquiring the right over the property. But there is lack of clarity on when this should be.
“One view is that for an under-construction property, till the time possession is taken, the same is merely a right and the holding period for disposal of such right starts from the date of booking,” said Kumar.
But there is another view. “The date of issue of an allotment letter or buyer agreement can be construed as the date on which the assessee has obtained the conveyance,” said Suraj Nangia, partner, Nangia & Co., a chartered accountancy firm.
After possession: Your right turns into physical holding of the property. “Where the property (flat) is constructed and handed over, the right gets transformed into the house, which is a different asset. The holding period of the flat (when sold after taking possession) will commence from the date when possession is taken over,” said Kumar. But again, there are differing views.
Even after taking possession, “it may also be possible to argue that holding period of flat should start from the date of allotment of the flat,” said Kumar. “A reference can be made to the Circular No. 471 by CBDT (Central Board of Direct Taxes) dated 15 October 1996, wherein it was clarified that the period of holding of the property booked by an assessee under self-finance scheme of DDA (Delhi Development Authority) will be counted from date of issuance of allotment letter by the DDA. This circular may be referred to for a construction-linked plan as well,” said Kumar.
Which date is considered—booking, allotment or possession—can also depend on the income-tax assessing officer. You may receive a notice seeking explanation on the basis on capital gains calculation. “This is not free from litigation and the authorities may litigate the same and consider the date of possession as the date of start of period of holding,” said Kumar.
“This is highly debatable. Right to acquire a property and physical possession of a property are not the same. So, date of acquisition has to be different,” said Gautam Nayak, a chartered accountant. “If a property is sold after possession, date of acquisition should be calculated from date of possession,” he added.
Cost of acquisition
Whether you sell the property before possession or after it, in both cases you need to calculate the cost of acquisition to ascertain capital gains or loss. If you sell after 36 months (three years) of buying, you have to calculate the indexed cost of acquisition. So, all payments made by the lender (the home loan provider) during the construction period need to be inflated as per the cost inflation index (CII) according to the date of payment.
Unfortunately, “there have been various contradictory views on this issue,” said Baweja. “In some cases, courts have held that cost of acquisition paid from time to time after allotment needs to be considered separately for each payment for computing indexed cost of acquisition or improvement.” However, “there are contrary decisions, where courts have held that indexation benefit may be taken from the date of acquisition of property on the entire cost of acquisition,” she explained.
The more common practice is indexing each payment according to the date it was made.
What should you do?
After considering the various interpretations, it seems that one possesses the right over the asset till it is under construction; after that, the right to purchase the flat gets converted into the flat itself. So, if you are selling a property after taking possession, the period of three years can start from the date of possession. If you intend to sell the flat soon after taking possession, then it may be better to sell while the flat is still under construction. and you don’t have possession. This will substantially reduce your tax liability, provided, of course, that three years have passed since you entered into the agreement to buy the flat.
Since there are various practices, check with a chartered accountant about the most suitable method.