buy new under construction property in mumbai

Whether investment in under-construction property, if held for more than 3 years, will be eligible for long term capital gain benefits? What are the benefits of buying space in under-construction projects?


What are the benefits of long term capital assets?

Income tax provides various benefits to long term capital assets such as:

  • Concessional rate of tax of 20%
  • Benefit of indexation of cost
  • Exemption from tax if sale amount is invested in specified Government securities or invested in new residential house. These are subject to certain conditions laid down in the Act.

Buying under-construction property

As per Income Tax Law, capital asset, being property (other than shares) if held for more than 3 years, is treated as Long Term capital asset.

Investment in under-construction property shall be eligible for long term capital gain benefits if the investment is treated as capital asset. As per legal pronouncements and stand accepted by the Tax authorities, letter of allotment issued on booking under construction property is treated as capital asset. Letter of allotment de-facto gives title of property with all the rights and responsibilities of ownership. Thus it’s a matter of great importance that while purchasing property, letter of allotment or any other document is executed which depicts entitlement to property.

Illustration

Mr. Kumar purchased an under construction residential house in April, 2011 for Rs. 84,00,000. He paid Rs. 20,00,000 on booking in April 2011, Rs. 20,00,000 in April 2012, Rs. 20,00,000 in April 2013 and balance Rs. 24,00,000 in April 2014 on getting possession. He sold the house in January , 2016 for Rs. 1,20,00,000. In this case residential house is a capital asset of Mr. Kumar and, hence, the gain of Rs. 36,00,000 arising on account of sale of residential house will be charged to tax under the head “Capital Gains”. As the property is held for more than 36 months, the gain shall be treated as ” Long Term Capital Gain” and taxed at the special rate of 20%. Also he will get benefit of indexation of cost which will substantially reduce the capital gain.

read-more-in-detail2Read more about property tax laws in India

To summarize, property under-construction shall be entitled to benefits of long term capital gain if held for more than 3 years.

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