Selling Under-construction Property saves tax

Are you intending to sell your property soon after taking possession for a better price? Well, then we must tell you that it is a misunderstood/miscalculated cash flow. It is essential for you to understand that it is better to carry out the transaction while the property is still under construction as it can help you save taxes.

The property is regarded as a capital asset and any gain arising from the sale of property is assessed under the head ‘Capital Gains’ as per the Income Tax Act. To claim exemption, the capital gain should either be invested in purchasing 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 from the date of transfer.

Clause for Exemption from tax

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

• The asset transferred or sold is a house and is a long-term capital asset (held for more than three years).
• The capital gain should be invested in purchasing 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.
• Long-term capital gains are taxed at 20 percent 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 the gains in specified investments.
• As per Section-54EC, any capital gain arising from the transfer of a long-term capital asset would be exempted 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.

Selling under-construction property before possession saves tax

In a property under-construction, the possession has not been given to you by the developer and is thus not considered as a property, but you have the right to purchase the property. When you take possession of the property, the right to purchase the property converts into the property. Thus, if you will to sell a property after taking possession, the period of three years starts from the date of taking possession of the flat. To claim tax exemption the asset should be held for more than three years.

Therefore, if you intend to sell the property soon after taking possession, it is better to carry out the sale while the property is still under-construction and possession is not given to you.