Clarifying Capital Gains on Real Estate: Possession as Acquisition Date
The author recommends 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 GainsTax LawProperty AcquisitionLitigationReal Estate NewsJan 20, 2025
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 the 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.
However, the interpretation of these dates, especially for under-construction properties, remains a significant source of ambiguity and dispute.
The past year saw the exchequer’s responsiveness in incorporating our recommendation for Budget 2024, which provided win-win taxation options of 12.50% (without indexation) or 20% (with indexation) on real estate long-term capital gains.
Building on this progress, we now focus on further clarifying the taxation of long-term capital gains (LTCG) on houses to reduce prolonged litigation and provide clarity to taxpayers.
These areas of ambiguity primarily pertain to the interpretation of the date of acquisition and the date of sale for computing the holding period and LTCG, as well as the dates of investment or reinvestment of sale proceeds or LTCG to avail of exemptions under Sections 54 and 54F.
In practical market practices, the key dates relevant for taxation can be understood as follows 1.
Booking a house, where the acquirer pays a token amount.2.
Issuance of an Allotment Letter specifying the floor or number with a substantial payment.3.
Registration of the Agreement for Sale under the Real Estate Regulation and Development Act (RERA), creating a contractual obligation.4.
Progress of construction over 1–5 years based on the payment schedule in the Agreement for Sale.5.
Milestones such as the registration of the Sale Deed, issuance of an occupancy certificate, etc.6.
Formal handover of possession to the acquirer.
For constructed and ready properties, the key dates are 1.
An initial handshake, where the acquirer pays a token amount.2.
Registration of the Agreement for Sale with or without full payment, creating an obligation.3.
Registration of the Sale Deed, especially for loan-financed purchases.
These incidences are crucial for both capital gains from sales and exemptions through reinvestment of capital gains or sale proceeds.
While there is a clear consensus on the acquisition and sale dates for completed properties, the ambiguity arises in the context of under-construction properties, particularly for investment or reinvestment under Sections 54 and 54F.
In practice, 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 can take 4–5 years.
However, some interpretations consider the registration of the Agreement for Sale as the acquisition date, which is impractical and often leads to disputes.
The thresholds for purchasing the new property one year before or two years after the sale of the old property, or completing construction within three years of the sale, are neither practical nor feasible under such interpretations.
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 would align with practical market practices and reduce the likelihood of disputes.
Additionally, a review of existing litigation on Section 54 and related exemption regimes, along with the application of the proposed clarification to all pending litigation, would benefit the exchequer and taxpayers alike.
Issuing 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 save precious human and financial resources on prolonged litigation and provide taxpayers with the certainty and peace of mind they need.
Adding this clarification either through the upcoming budget or a comprehensive circular—or both—would be a win-win solution for all stakeholders.
Frequently Asked Questions
What is the current ambiguity in the acquisition date for under-construction properties?
The current ambiguity lies in whether the acquisition date for under-construction properties should be the date of registering the Agreement for Sale or the date of possession. Different interpretations lead to disputes and prolonged litigation.
Why is the recommendation to treat the date of possession as the acquisition date important?
Treating the date of possession as the acquisition date aligns with practical market practices and reduces the likelihood of disputes. It makes the thresholds for purchasing a new property or completing construction more feasible.
What are the key dates relevant for taxation in under-construction property transactions?
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 the registration of the Sale Deed and occupancy certificate, and formal handover of possession.
How does the recommended clarification benefit the exchequer and taxpayers?
The clarification would save precious human and financial resources on prolonged litigation and provide taxpayers with clear guidance and peace of mind, benefiting both the exchequer and taxpayers.
What additional measures are suggested to provide clarity to taxpayers?
Issuing a comprehensive circular or FAQ defining acquisition and sale dates based on common points of dispute in pending litigation would provide clear guidance to taxpayers and reduce ambiguity.
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