When a financial asset is transferred, the surplus or deficit is a capital gain or loss

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: 1. I purchased a flat (A) in August 2004 (full down payment and allotment letter received in Aug 2004), for which construction was completed in March 2007 and the builder handed over possession to me in April 2007.

2. I purchased another flat (B) in October 2007 (again full down payment and allotment letter received), for which construction has already started and I will get possession in April 2010.

3. If I sell the first flat (A) today, will the gains be ST or LT? Also, will the gains be taxable, since the flat (B) costs definitely much more than the profit that I will make through selling flat (A)?

—Surjeet Datta

The date of acquisition of your flat falls in April 2007 and not in August 2004. In August 2004, you have earned a right to own a flat when you entered into a contract with the builder. Had you sold the property before taking possession of the flat when if was ready for possession, you would have earned capital gains. The long-term or short-term nature of the sale of this 'right to possess' would depend upon whether the period of 3 years has elapsed from the date of the contract.

After the flat is ready, it becomes a different species. The clock for long-term or short-term starts once again from the date of your taking possession and the cost of acquisition is the total payment to the builder.

Since the builder handed over the possession of the flat in April 2007, if you sell the flat before the period of 3 years (March 2010), you would be earning short-term capital gains.

The exemption available u/s 54 is only on long-term capital gains arising from the sale of a residential flat, if the assessee purchases another residential flat within a stipulated time frame.

In case you sell flat (B) now, you will be required to add the short-term capital gains to your normal income and pay tax thereon at the applicable rates.