Clarifying Capital Gains in Real Estate: Simplifying Acquisition and Reinvestment Dates
The author suggests that the Finance Minister consider adding a clarification to treat the date of possession as the date of acquisition for under-construction properties under Sections 54 and 54F to ease litigation and provide clarity to taxpayers.
Real EstateCapital GainsSection 54Section 54fTax LitigationReal EstateJan 20, 2025
This is primarily due to the diverse interpretations and judgments at various tax and judicial levels.
The key areas of contention pertain to the interpretation of the date of acquisition and the date of sale, which are crucial for computing the holding period and long-term capital gains (LTCG) as per Section 48, as well as the dates of investment or reinvestment of sale proceeds or LTCG for exemptions under Sections 54 and 54F.
It was encouraging to see the responsiveness of the exchequer in the Budget 2024, which introduced win-win taxation options of 12.50% (without indexation) or 20% (with indexation) on realty long-term capital gains.
Building on this, we now address areas that continue to cause significant disputes and litigation, often lasting 5-10 years.
These disputes not only burden the exchequer's resources but also create uncertainty for taxpayers.
The key dates relevant for taxation incidences, as per widely prevalent and practical market practices, can generally be understood as follows
1.
For new or under-construction properties
- Booking a house, where the acquirer pays a token amount.
- Issuance of an allotment letter specifying the floor or number, accompanied by the payment of a material amount.
- Registration of the Agreement for Sale under RERA, creating a contractual obligation.
- Progress of construction over 1-5 years based on the payment schedule in the Agreement for Sale.
- Milestones such as Sale Deed registration, occupancy certificate, etc.
- Formal handover of possession to the acquirer.
2.
For constructed and ready properties
- An initial handshake, where the acquirer pays a token amount.
- Registration of the Agreement for Sale with or without full payment, creating an obligation.
- Registration of the Sale Deed, especially for loan-financed purchases.
These incidences are relevant for both capital gains from sales and exemptions through reinvestment of capital gains or sale proceeds.
There is a predominant consensus in High Court (HC) and Income Tax Appellate Tribunal (ITAT) judgments on treating the date of the Allotment Letter or registration of the Agreement for Sale as the acquisition date, and the date of registration of the Agreement for Sale or Sale Deed as the sale date.
This leaves limited scope for ambiguity.
However, interpretations related to exemptions under Sections 54 and 54F, particularly for investment or reinvestment in under-construction properties, remain diverse and often lead to perverse outcomes.
For instance, a homeowner who owns a single house typically books a new under-construction house and sells their old house around or after taking possession of the new house, which may take 4-5 years.
In some interpretations, the acquisition date for the under-construction house is considered to be the date of registering the Agreement for Sale and not the date of possession.
This makes it impractical and infeasible to meet the thresholds for purchasing a new property one year before or two years after the sale of the old property, or completing construction within three years of the sale, leading to disputes.
To address these issues, the author recommends that the Honorable Finance Minister consider adding a clarification to treat the date of possession as the date of acquisition for under-construction properties under Sections 54 and 54F.
This clarification should be applied to all pending litigation on the subject to reduce the burden on the exchequer and provide taxpayers with certainty.
Additionally, the issuance of a comprehensive circular or FAQ defining acquisition and sale dates based on common points of dispute in pending litigation would provide taxpayers with clear guidance.
Such measures would undoubtedly benefit the exchequer by saving human and financial resources on protracted litigation and provide taxpayers with peace of mind.
Adding this clarification either via enactment in the upcoming budget or through a comprehensive circular—or both—would be a win-win solution for all stakeholders.
Frequently Asked Questions
What are the key dates relevant for taxation incidences in real estate?
The key dates include booking a house, issuance of an allotment letter, registration of the Agreement for Sale under RERA, progress of construction, milestones like Sale Deed registration and occupancy certificate, and formal handover of possession.
Why is there a need for clarification in the date of acquisition for under-construction properties?
Clarification is needed because interpretations vary, leading to disputes. Treating the date of possession as the date of acquisition would make the thresholds for purchasing a new property more practical and feasible.
What are the sections of the law that are often subject to diverse interpretations?
Sections 54 and 54F, which pertain to exemptions for reinvestment of capital gains or sale proceeds, are often subject to diverse interpretations.
What is the impact of prolonged litigation on real estate capital gains?
Prolonged litigation burdens the exchequer's resources and creates uncertainty for taxpayers, leading to significant financial and emotional costs.
What is the proposed solution to ease litigation and provide clarity to taxpayers?
The proposed solution is to clarify that the date of possession should be treated as the date of acquisition for under-construction properties under Sections 54 and 54F, and to issue a comprehensive circular or FAQ to guide taxpayers.
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