Get capital gains benefit in case of project delay

Only the amount invested during the stipulated time mentioned in the law will be eligible

Recently, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled if a taxpayer invests capital gains of one house property into an under-construction flat, it should be considered at par with him constructing his own house, rather than a purchase.

The ruling brings relief to taxpayers facing project delays, by giving them an additional year. Section 54 of the I-T Act deals with capital gains from a house property. It says taxpayers can get the capital gains tax benefit only if they invest in a new property one year before the sale of an old one or two years after it. When a person is constructing his own house, he needs to invest the money within three years and complete the property in this period.

“Tribunals have taken the view that when an individual buys a property in an under-construction project, it can be considered as ‘self-financing’ the house. The developer is just constructing it and, therefore, it can be considered as construction, instead of purchase,” says Neha Malhotra, executive director, Nangia & Co. She says tribunals and courts have mostly ruled in favour of taxpayers, as this is an exemption section.

But, what happens if the developer doesn’t deliver the project on time? If one takes a strict interpretation of the laws, the taxpayer stands to lose the capital gains tax benefit if a project is delayed beyond the time specified in the law. A few tribunals and courts have provided relief for delays by developers in completing the project, allowing them to still take the benefit. “While the individual may be eligible for the benefit, he would only get the deduction for the sum deployed within those three years. Anything paid beyond would not be considered,” says Naveen Wadhwa, general manager, Taxmann.com.

The same principle will apply when a person is constructing a flat. He can get the benefit even if the construction is not completed on time. If a person buys a property from a developer, the project is considered completed when it receives an occupancy certificate. But, experts say when it comes an individual constructing his own house, there are no benchmarks to say when is it actually completed. Courts and tribunals, therefore, allow the tax benefits for the money deployed within the stipulated period of three years.

There have also been cases based on the language used in the tax law. Capital gains relief is provided when someone purchases a flat one year before or two years after selling the old property. But, when constructing a flat, it’s three years after the date of sale. 

What if the person starts construction one year before selling the flat? Will he still be eligible? According to experts, the taxpayer can still get the benefit of capital gains tax. But, only the money that’s invested after the sale of the flat will be considered for the benefit.

In such situations, claiming capital gains benefit can get tricky. “Taxpayers should keep proper invoices, with dates clearly mentioned, to be able to show to the authorities when needed,” says Malhotra. If you hire a carpenter or contractor that gave you handwritten bills, the tax authorities may not consider such documents.