Know the income tax rules for selling a property under construction versus a move-in ready home

Income tax rules for selling property under construction vs. move-in ready

The income tax law, 1961 contains special provisions for the computation of capital gains from the sale of immovable property. Real estate disposal capital gains tax is levied based on how long the property has been held by the seller. If held for less than 2 years, the proceeds earned would be classified as a short-term capital gain and if held by the seller for more than 2 years, it is considered a long-term capital gain term.
A seller must understand these provisions and accurately calculate their tax liability. Tax laws that apply to a fully constructed residential home may not apply to a sale of a home under construction. A property under construction remains capital property for income tax purposes. However, for specific provisions, it should not be considered as land or building.

When the capital gain calculation is involved, it must be identified whether the asset in question is a capital asset or not. Once this aspect has been identified, it is necessary to identify its nature, duration of ownership, exemption and tax rates.

Let’s consider each aspect of taxation in the event of the transfer/sale of a property under construction.

“Capital Assets” means property of any kind owned by an assessee, whether or not related to his or her business or profession, except as expressly excluded. The term “property” is a word of the greatest breadth, as the definition of income tax has reaffirmed it using the words “of any kind”.

The term ownership is indicative and descriptive of all possible interests a person may have. Thus, any right that can be qualified as property will be included in the definition of “capital assets”.

When you book a house in a property under construction, you get the right to buy that house. As long as the house does not exist, the buyer simply has the right to buy the house. When construction is complete, you will be entitled to possession of the house by exercising your right to purchase. Thus, the right to buy is a capital good.

When you sell the right to a property under construction, the “right to own a house” capital asset is sold in that property under construction and not in the land or building itself. This distinction is essential because the flexibility granted by the Income Tax Act to calculate the period of ownership of land or building does not apply to the house under construction.

Tax rate

The short-term capital gain from the sale of a house under construction is taxable at the applicable income tax slab rates. Long-term capital gains, after claiming the Section 54F exemption, if any, are taxable at 20% with indexation benefit.

Comments are closed.