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Selling Under-construction Property saves tax

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

Property Tax MumbaiAre 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.


16 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.

    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)?

  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.

  10. Lakshman says:

    I have purchased a newly consturcted Flat in Virar Mumabi, I made agreement and I paid all amount to Builder. But I still not get Possession due to OC. I have started to pay EMI, So Can I sell my Property now?

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