Long term capital gain on house property

YATIN (Querist) 26 August 2023 This query is : Resolved
I am getting long term capital gain (LTCG) on sale of my residential flat. I would be investing this LTCG to purchase new flat in under construction scheme of a developer. Being a high rise tower the registered sale deed/possession for new flat will happen after three & half years. However I will make full payment for this new flat within six months of sale of my old flat. To get exemption of LTCG tax u/s 54 Income Tax act, I have to purchase another residence within two years. In my case wherein I will be making full payment for new flat within 6 months, but possession will be given after three & half years. Would my making full payment to developer in 6 months be considered as purchase & will I get exemption of cap gains tax u/s 54 even if possession will be after 42 months? I request to have notifications/case laws to support my claim since scrutiny is faceless now.

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This discussion explores whether investing long-term capital gains (LTCG) into an under-construction property, where full payment is made within six months but possession is delayed for over three years, qualifies for tax exemption under Section 54 of the Income Tax Act. Based on Madras High Court rulings, the focus is on the investment aspect rather than immediate occupation or possession. The key takeaway is that making the investment within the stipulated timeframe is crucial for claiming the exemption, even if the property isn't ready for occupation.

kavksatyanarayana (Expert) 27 August 2023
Consult a local CA/CS or post this query on CAclubindia.com for guidance.

T. Kalaiselvan, Advocate (Expert) 27 August 2023
An under-construction property must be completed within three years of the sale of the old house. Section 54 deduction can be claimed even if you booked a new home or started the construction before the sale of the old home.
In Sardarmal Kothari 302 ITR 286 (Mad) the Hon’ble Madras High court held that : Section 54F of Income tax is a beneficial provision for promoting the construction of residential house & requires to be construed liberally for achieving that purpose. The intention of the Legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are ‘purchased’ or ‘constructed’. The condition precedent for claiming benefit u/s 54F is that the capital gain should be parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. Merely because the sale deed had not been executed or that construction is not complete and it is not in a fit condition to be occupied does not dis entitle the assessee to claim s. 54F relief.

P. Venu (Expert) 29 August 2023
Yes, the judgment of the Madras High Court in The Commissioner Of Income Tax vs Shri Sardarmal Kothari lays down that what is relevant is the aspect of investment and not the occupation or possession of the property.

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