Tax benefits on under-construction property: Why the possession date matters more than you think!

Tax benefits on under-construction property: Why the house possession date matters more than you think! (Image: Freepik)

Taxpayers often get confused about taxation rules pertaining to under-construction properties in India. The under-construction or pre-possession period refers to the duration between the start of a home loan and completion of the construction of the property under consideration. As per the income tax laws, tax benefits on loan for an under-construction property can be claimed in 5 equal installments starting from the financial year in which the homebuyer gets possession of the house.

Another confusion that often arises is pertaining to capital gains tax on selling of such properties. The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) recently clarified that when it comes to tax liability, the date of possession should be considered under section 54 of the Income-tax (I-T) Act.

This ruling is significant in a sense that it makes clear that tax benefits can be claimed after selling the house only when the proceeds are invested to buy a new house within a specific period. It means that when the sale proceeds from a house is invested to buy a new house, the tax one has to pay on the profit from selling the old house comes lower.

As per the I-T laws, the new house must be purchased within one year before or two years after selling the old house. Alternatively, one needs to build his or her new residential property within three years from the date of selling the old property.

Coming to ITAT ruling, this was related to a particular case of a non-resident couple for FY2010-11. In this case, the Income Tax Department did not allow the tax exemption on capital gains. Actually, the matter is pertaining to interpretation of Section 54 of the Income Tax Act, 1961. This is mainly related to the date for claiming tax exemption on capital gains on sale proceeds from an old property. The tax department viewed the couple’s claim as an incorrect deduction. The income tax officer dealing with the matter also charged them with ‘concealment of income’ or ‘furnishing of inaccurate particulars of income’.

The couple had sold their old house in February 2011. The couple bought a new house between February 11, 2010 (one year prior) and February 9, 2013 (two years after) – and this is what the I-T laws allowed them. However, they were denied the tax benefit, on the grounds that the agreement with the builder for the new house was executed in July 2009. The couple appealed, and the ITAT ruled in their favor. The ITAT bench also clarified that by signing the agreement with the builder, only the right to purchase had been acquired; and that the date of possession, i.e. February 2, 2011, needed to be considered for the tax benefit.

What is section 54 tax benefit?

Under the Income-tax Act, 1961, taxpayers can claim tax benefits on long-term capital gains (LTCG) by investing in specific investment instruments. These investments should be as per the guidelines outlined in Sections 54 to 54GB of the I-T laws. Under Section 54 of the Income-Tax Act, a taxpayer is allowed to claim tax benefits on long-term capital gains by investing in a residential house. The tax laws say that tax benefits on long-term capital gains under Section 54 can be claimed if a new residential house is purchased within two years after selling the old house or one year before the sale of the property. The tax benefit is also allowed if a new house is built within three years from the date of the sale.