Clarifying Capital Gains on Real Estate: Simplifying Acquisition and Reinvestment Dates
The article suggests that the Finance Minister should 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 prolonged litigation.
Capital GainsReal EstateAcquisition DateReinvestmentLitigationReal Estate MumbaiJan 20, 2025
There is a predominant consensus in High Court 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.
However, the interpretations related to exemptions under Sections 54 and 54F, particularly for under-construction properties, remain diverse and often lead to prolonged litigation lasting 5-10 years.
This situation burdens the resources of all involved parties, from the judiciary to the taxpayers.
The responsiveness of the exchequer in the 2024 Budget, which provided win-win taxation options of 12.50% (without indexation) or 20% (with indexation) on real estate long-term capital gains, was encouraging.
Building on this, it is essential to address the areas of taxation of long-term capital gains (LTCG) on houses where diverse interpretations and judgments have led to significant legal disputes.
These areas primarily pertain to the interpretation of the date of acquisition and the date of sale for computing the holding period and long-term capital gains (Section 48), as well as the dates of investment or reinvestment of sale proceeds or long-term capital gains to avail exemptions under Sections 54 and 54F.
The key dates relevant for taxation incidences, as per widely prevalent and practical market practices, can 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 with 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.
While there is limited scope for ambiguity in the computation of capital gains, the interpretations related to exemptions under Sections 54 and 54F, particularly for under-construction properties, remain a gray area.
Practically, a homeowner who owns a single house, as is the case for the vast majority, 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.
However, 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 leads to impractical 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, often resulting in 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 review the quantum of existing disputes.
Furthermore, 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 certainty and 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 is the primary issue addressed in the article?
The primary issue addressed is the ambiguity in the interpretation of acquisition and sale dates for under-construction properties, leading to prolonged litigation under Sections 54 and 54F.
What is the recommendation made to the Finance Minister?
The recommendation is to treat the date of possession as the date of acquisition for under-construction properties under Sections 54 and 54F to ease litigation.
Why is the date of possession important for under-construction properties?
The date of possession is important because it is a more practical and realistic date for homeowners to consider when selling their old property, as compared to the date of registering the Agreement for Sale.
How would a clarification benefit the exchequer and taxpayers?
A clarification would benefit the exchequer by saving resources on protracted litigation and provide taxpayers with certainty and peace of mind.
What are the key dates relevant for taxation in real estate transactions?
The key dates include the booking of the house, issuance of an allotment letter, registration of the Agreement for Sale, progress of construction, and formal handover of possession.
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