By buld_online 
I got into an agreement to purchase an under construction flat on 6 November 2022 and have paid substantial amount. I have decided to sell that flat now that the building has not yet fully completed. I haven’t paid stamp duty or registration charges and neither have I taken possession of the said flat. I am a salaried person and fall in the highest tax bracket. I plan to reinvest the amount from sale of flat for buying another residential property. In this regard, how will the tax be calculated as three years have not passed since the date of agreement? Will it be treated as short term capital gain or long term capital gains? If I invest in another property can I avoid paying tax under section 54 or 54F of Income Tax Act?
Reply by: Balwant Jain, tax expert
In my opinion, by paying for an under construction property, what you get is a right to get the property which is distinct from the right in the residential property. The cost of acquisition of this right is the total cost as per the agreement. The fact that you did not pay the entire sum in one go is immaterial and inconsequential. If the property is sold before taking the possession, you would be earning capital gains. The cost of the acquisition of this right is the total contracted price as reduced by the amount outstanding on the flat.
Since the holding period requirement for all classes of assets except listed securities has been uniformly made 24 months w.e.f. July 23, 2024, all the assets other than listed securities become long term after having been held for more than 24 months. So the requirement to hold this right for 36 months has come down to 24 months after amendment made in budget 2024. The profits made by you on sale of this right will be treated as long term capital gains and will get taxed at flat 12.50 per cent if you do not wish to claim any exemption.
Since you are not selling a residential property but a right to acquire a residential property, you will be able to claim exemption under Section 54F and not under Section 54 and you will be required to invest net value of consideration received from sale of the under construction property. If you sell it after taking possession your right to get a flat gets converted into right in the flat and you would be eligible to claim exemption under Section 54 and required to invest only the difference between your cost and the sell price in another residential house.
In both the situation the new residential property has to to be acquired within two years from the date of sale of the under construction property. In case you go for an under construction property, a longer period of three years is available within which the construction of the property should get completed. The amount which is not utilised by the due date of filing of your ITR is required to be deposited in a capital gains account with a bank. The money so deposited can be utilised for acquiring the residential house within prescribed time period.
(Views expressed by the tax/investment expert are his/her own)