Income-Tax Act, 1961 has special provisions for the computation of capital gains from the sale of immovable property. Tax on capital gains on sale of property is levied depending on the duration for which the property was held by the seller. If it was 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 as a long-term capital gain.
seller must understand these provisions and compute his tax liability accurately. Tax laws that apply to a fully constructed residential house might not apply on an under-construction house sale. 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.
Let’s consider each aspect of taxation in case of a transfer/sale of an under-construction property.
“Capital asset” means a property of any kind held by an assessee, whether or not connected with his business or profession, except those expressly excluded. The term “property” is a word of the widest amplitude, as the income-tax definition has re-emphasised this by using the words “of any kind”.
The expression property is indicative and descriptive of every possible interest a person can have. Thus, any right which can be called a property will be included in the definition of “capital assets”.
When you book a house in an under-construction property, you get the right to buy that house. Until the house comes into existence, the buyer merely has the right to buy the house. When the construction is completed, you shall be entitled to the possession of the house by exercising your right to buy. Thus, the right to buy is a capital asset.
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.
Income tax rate
Short-term capital gain from selling an under-construction house is taxable at the applicable income tax slab rates. The long-term capital gains, after claiming the exemption under Section 54F, if any, shall be taxable at 20% with indexation benefit.