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Selling Under-construction Property saves tax

Comments(15) Sub Category:Property Posted On: Nov 16, 2010

If you are intending to sell the flat soon after taking possession, it is better to carry out the sale while the flat is still under construction. The Property is regarded as a capital asset and any gains arising from the sale of property is assessed under the head ‘Capital Gains’ as per the Income Tax Act. The capital gain should be invested in the purchase of another house either one year before or within two years from the date of transfer, or used for construction of a house within three years of the date of transfer.


Exemptions from tax

Section 54 of Income Tax Act provides exemption from tax to individuals, on capital gain arising from the transfer or sale of a house if following conditions are satisfied.

  • The asset transferred or sold is a house and it is a long-term capital asset (held for more than three years).
  • The capital gain should be invested in the purchase of another house either one year before or within two years from the date of transfer, or used for construction of a house within three years of the date of transfer.
  • The property purchased or constructed is not transferred within three years from the purchase date.

As per Section 54EC, any capital gain arising from the transfer of a long-term capital asset would be exempt if the capital gain is invested within a period of six months in specified investment bonds of the National Highway Authority of India or Rural Electrification Corp. Ltd

Long-term capital gains are taxed at 20% with the beneficial computation by indexing the cost of acquisition. If you do not want to acquire property and yet wants to save capital gains tax, invest capital gain in specified investments such as- 3 year bonds of National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd (REC) within a period of six months.

You can also avail tax exemption if you purchase a house within two years from sale of the old house. The capital gain can also used for construction of a house within three years of the date of transfer. If you book a residential property under construction, you can do this within three years as the law does not require that you yourself should get the construction done. In this case, construction by a builder will also allow you to claim an exemption.

Selling under-construction flat before possession saves tax

If you intending to sell the flat soon after taking possession, it is better to carry out the sales while the flat is still under-construction. The flat under-construction and the possession has not been given to you by the builder is not flat but the right to purchase the flat. When you take possession of the flat which you have agreed to purchase, the right to purchase the flat gets converted into the flat. Therefore, if you are selling the flat after taking possession of the flat, the period of three years starts from the date of taking possession of the flat.

To claim exemptions from tax, the asset should be held for more than three years. The period of three years starts from the date of taking possession of the flat. Therefore, if you intending to sell the flat soon after taking possession, it is better to carry out the sales while the flat is still under-construction and possession is not yet taken by you.

Disclaimer: The article contains data collected from various sources and the use of same is at readers discretion.

15 Responses to “Selling Under-construction Property saves tax”

  1. Navin Thirani says:

    I want to know whether selling the flat flat while it is under construction will attract capital gain. I have one flat flat whic was booked in 2007 and an unregistered ageeemnt on 10 rs stamp paper was made. Possession of the flat is going to be completed in two months time. If i sell the flat today, will it attract Long term capital gain.

    rgards
    navin 9820170477

    • Jhumpa says:

      Navin – tricky question. The answer is NO if you’re capital asset is in a tier 2 city like Chennai, Kolkotta, Hyderabad and Pune. Refer to the recent study by Gramin. If your investment is in Mumbai or New Delhi, it is without doubt a safe bet and construction will indeed attract a hefty capital gain.

      • Navin says:

        Thanks for advice. I understand that my transaction shall attract 30% flat. Is my understanding correct.

      • Shekhar Tiwatne says:

        Would appreciate if a pointer to Gramin study is provided.

      • anuj says:

        As i udnerstood from above that selling a flat under consturction will also attract Tax liability ( long and short is a different story.) then there is no tax saving if selling the flat underconstruction.

  2. V says:

    I invested in a property in Mumbai in June 2009. The agreement was registered in July 2009. The building hasn’t yet received its Occupancy Certificate and as such, possession hasn’t been transferred to me yet (although several residents have opted to move in without the OC). I am planning to sell this flat and invest in another one. I had planned to wait until July 2012 so that gains can be categorised as long term. The discussion above seems to suggest that I should do so before final possession is transferred. I have two questions in this regard:
    1. What date is relevant to calculate gains (long term vs short term) in this case? Is it the date of entering the agreement or the date of registration of the agreement or some other date?
    2. If i sell it once I get possession, then what will the date be for calculation of gains (long term vs short term)?
    Thanks

  3. manoj says:

    I have invested in a flat which is under construction, registration is also completed in last month. Possession will be done in December 2012. I want to sell that flat because I have found another construction which is feasible to me. So can I do so? And if yes how can I search the proper person to whom I can sell.

    • Radha says:

      hey Hi Manoj ,

      Hope you are well .

      Kindly let me know the place & what is your expectation , As I am interested to buy .

      Requesting you to describe more about property .

  4. Krotzer says:

    Hello my family member! I wish to say that this post is awesome, great written and include approximately all significant infos. I’d like to peer extra posts like this .

  5. Pradeep says:

    As per new rule what is the service tax which one has to pay on purchase of under construction property.
    From which year and month it is applicable. I have purchased a under construction in May 2010. Am am applicable for the service tax.

  6. Atul says:

    I want to sell my underconstruction flat?Can I sell it before taking posession which is expected in October12.
    How much tax % will be levied on me ,if any?

    • Radha says:

      hey Hi Atul ,

      Hope you are well .

      Kindly let me know the place & what is your expectation , As I am interested to buy .

      Requesting you to describe more about property .

  7. Kamal says:

    Hi,, I am planning to sell my underconstruction [ Almost completed ]flat in Bangalore.
    I have taken a loan with LIC.
    My Questions
    1> Wheter LIC will have no objection before registering my flat?
    2> I have already submitted my original documents to the Bank , so when the new customer will need those documents for getting a Loan for him,,, is it feasible to get those from LIC ??
    3> My Builder told we need to cancel my sale agreement so the procedure will get complicated !!! So better to register and then re-sell is it true???

  8. Bakul says:

    I have booked a 2 BHK flat in 2011 & flat is ready & now builder is asking me for additonal money agaisnt terrace built up by builder besides Bedroom & provided access for terrace from my master bedroom.
    Builder is not ready for supplementry agreement & ready to mention terrace part in allotment letter.

    Please suggest on this concern.

  9. Purushotham says:

    It would be great if someone contact me via email.

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