Tax Implications on Selling an Under-Construction Property Before Possession

Tax Implications on Selling an Under-Construction Property Before Possession: The real estate market is in a constant state of change, and people often find themselves dealing with complex tax issues, especially when selling an under-construction property before taking possession. Here is a detailed view of the taxation scenario for such transactions, illustrated with a real-life example.

Case Study: Selling a Flat Before Possession

In May 2022, a person booked a flat for ₹80 lakh and paid ₹70 lakh towards instalments. The property was scheduled for possession in October 2024, with the final instalment of ₹10 lakh payable at that time. Before taking possession, the person managed to find a buyer who agreed to pay ₹95 lakh. The buyer agreed to pay the final instalment directly to the builder, thereby valuing the property at ₹1.05 crore.

Implication on Taxes from the Transaction

When you buy a flat, you acquire a “right to own” the property. Such right is a capital asset and any profit arising on transferring such right is treated as capital gains. This right was acquired in May 2022, and it has been more than two years since the transfer has happened in October 2024. Hence, such profit arising on sale falls within the head of long-term capital gains (LTCG).

True sale value: ₹1.05 crore. The directly paid amount of ₹10 lakh to the builder from the buyer is irrelevant here as it is considered an amount received by the seller.
Cost of acquisition: ₹80 lakh.
Capital Gain: ₹1.05 crore – ₹80 lakh = ₹25 lakh.
These long-term capital gain liable for 20% being indexation benefit.

Alternate Scenario: Selling After Possession

Had the seller paid the final instalment, taken possession, and then sold the flat immediately, it would have been short-term capital gains (STCG). This is because the asset would no longer be a “right in property” but a “residential property,” and the holding period for this new asset would be less than two years. Short-term gains are taxed at normal income tax rates, which could lead to a higher tax outgo.

Judicial Precedents and Debates

Certain tax tribunals have taken the argument that reservation of a flat also invokes rights to own such that a person holds that very flat. Proceeding logically from there, proceeds for selling a flat wherein it was in possession but booked long time ago can be counted for LTCG too. These opinions are not on complete agreement; therefore, remain debateable.

Gurus Quotes

Balwant Jain, a tax and investment expert, has called for justice in the treatment of capital gains tax as short-term merely because possession has been taken. “By booking the flat, you effectively acquire a right in the flat. The nature of this right does not change post-possession,” he has noted while pushing for more rational thinking.
Conclusion

The tax effects of property transactions need to be understood for effective financial planning. For individuals planning similar sales, consulting with a tax expert is always advisable to optimize liabilities and maintain law compliance.