AJ (Consultant ) 26 February 2024

Resale understand construction builder flat - ltcg or stcg?

Mr. A purchased residential property from builder in Noida, through regular BBA and allotment letter in July 2016.
Mr A sold the under construction property to Mr. B through builder transfer process i.e. the property got endorsed to Mr. B in Aug.2022 (meaning BBA and allotment letter got endorsed, but no change in allotment)
Mr. B sold the property to Mr. C in Jan.2024, through same endorsement process of builder and property is still under construction.
Assume any property value greater than 50 lakhs (so that 1% TDS is applicable)

Questions:
1. Mr. C will needs to pay LTCG or STCG?

My Reasoning (based on some research):
As there are many verdicts and decisions from court recently, so it's not clear about the holding period. However, based on reading through different articles, i concluded the holding period will be calculated from allotment letter by builder for under construction property, but my doubt is, the holding period will be calculated from endorsement of allotment (in Aug.22 to Mr.B) or original allotment (in July 2016 to Mr.A)?
a. If holding period is calculated from original allotment then Mr.C needs to pay LTCG
b. Otherwise, if endorsed allotment is considered then STCG (however i believe this is due to less than 2 years, but not sure for under construction if it's 3 years?)

Any guidance or suggestions will be really helpful.

Thanks in advance of your recommendation/suggestions/guidance/sharing knowledge and participation!

Reply Follow

2 Replies

Dr. J C Vashista (Advocate ) 26 February 2024

Long term and Short term capital gains is a subject of income tax.

Post your query in CA club,

T. Kalaiselvan, Advocate (Advocate) 27 February 2024

An under-construction property is still a capital asset for income tax purposes. However, for specific provisions, it should not be treated as land or building.

When the computation of capital gain is in question, one must identify whether the asset in question is a capital asset or not. Once this aspect is figured out, one should move to identify its nature, period of holding, exemption and tax rates.

When you sell the right in an under-construction property, the capital asset "right to acquire a house" is being sold in that under-construction property and not the land or building per se. This distinction is essential because the relaxation given by the Income-tax Act to compute the period of holding of land or building does not apply to the under-construction house.

Since the under-construction house is neither land nor a building, the period of holding is 36 months or more to qualify as a long-term capital asset. In other words, if the booking right in an under-construction house is not held at least 36 months before the sale, the resultant gains shall be taxable as a short-term capital gain.

Indeed, when the under-construction house qualifies as a long-term capital asset, the benefit of indexation shall be available. All the payments made to acquire the booking right of the house shall be considered as the cost of acquisition and will be indexed, taking the year of obtaining the right as a base.