Tax on capital gains from selling a house depends on period of holding

Posted online: Tuesday, Apr 08, 2014 at 0000 hrs
While each one of us wants to invest in real estate, one needs to be conscious of the tax implications. Tax on capital gains from selling a house depends on the period of holding. If a property is sold before three years of acquisition, the gains will qualify as short-term capital gains taxable like any other income of the assessee.

However, if the property is sold after three years of acquisition, the capital gains, known as long-term gains, are taxable at 20%. In addition to that, the assessee can also avail the benefit of an inflated cost of acquisition.

Additionally, the Income Tax Act provides for exemption from taxation of capital gains if the assessee invests them in a residential house within two years from the sale or constructs another house within three years from sale. However, if the newly acquired house is sold within three years from acquisition, the exemption claimed earlier becomes taxable.

The date of acquisition is of immense importance to determine the nature of the capital asset as well as to claim the exemption. However, in case of self-financed builder flats, the concept of date of acquisition has been quite litigative. Various questions arise in the minds of the intended buyer.

First, does an assessee acquire an asset by booking a flat? Capital asset has been defined to mean property of any kind. Hence, a right to obtain conveyance of an immovable property can be construed as a “property”. Accordingly, if the booking agreement and allotment terms of the builder give a right to obtain conveyance on the flat, that itself will be “an asset” under the Income Tax Act.

Second, whether the gain on transfer of such rights in the flat or on transfer of the flats after talking possession thereof is short term or long term? The deciding factor is the date of acquisition. Indian tax authorities are giving priority to the facts of the case. It has been held in various rulings that the crucial date is the date of allotment of the residential flat and the payment of instalment is merely a follow-up action. Hence, the date of issue of an allotment letter can be construed as the date on which the assessee has obtained the conveyance on the flat.

Lastly, in respect of the exemption claimed under Section 54/54F, where the builder delays the construction of the flats beyond three years, whether the assessee shall be liable to pay the tax thereon? Strictly applying the provision, one is compelled to think that the exemption shall stand withdrawn in case of any delay beyond three years.

However, relying on the ruling of higher judicial authorities, one can heave a sigh of relief, since it has been repeatedly held that where it is found that most of the sales consideration has been spent for construction of house, but some portions are not complete for various reasons, the assessee is not liable for delay on part of the builder.

The courts are taking a liberal view in respect of Section 54/54F, and are holding that merely because the builder delayed the possession of the flat, the assessee cannot be held liable to tax. Even the CBDT has clarified that an investment in a self-financed flat will qualify as construction under Section 54F and the date of allotment of flat by an institution will be the date and payment is only a follow-up action and taking possession of the flat is only a formality.

Rakesh Nangia

The writer is managing partner, Nangia & Co