How to calculate the holding period for an under-construction property


How should the holding period for a property be calculated? Is it two years from the date of allotment or the date on which possession was taken? Here’s a look at a few court judgements that will help answer this question

A holding period of 24 months is crucial for a person to be able to claim tax benefits associated with long-term capital gains on property sale. Long-term capital gains give a property seller the benefits of indexation, concession rate of 20% and an avenue to save tax by investing in another residential house or capital gains bonds.

However, there are certain ambiguities when it comes to calculating the holding period for an under-construction property – whether the holding period shall be calculated from the date on which the property was booked or its possession date. Since the existing laws do not provide a clear answer, we have to look at judicial pronouncements. The situation becomes trickier when there are conflicting decisions about the same.

Decisions about the holding period:

The first decision counts the holding period from the date of allotment letter. In the decision of ‘Vinod Kumar Jain Vs CIT 344 ITR 501 (P & H)’, the Punjab and Haryana High Court held that for flats allotted by the Delhi Development Authority (DDA), the holding period should be counted from the date of allotment letter. The Central Board of Direct Taxes (CBDT) also issued a circular (No. 471, dated 15th October 1986), where it has clarified that for flats under self-financing schemes of the DDA, the holding period shall begin from date of the allotment letter.

See also: Holding period of a house and its impact on income tax benefits

However, in another case decided by the Bombay High Court – CIT Vs Dr DA Irani Dr BP Saraf and AY Sakhare, JJ IT Reference No 112 of 1987 September 15, 1998 – the High Court held that for a flat allotted in lieu of tenancy rights, the holding period of the flat shall start from the possession date of flat and the holding period tenancy right in the property shall be ignored.

Moreover, in the more recent case of ‘Jaimal K Shah, Mumbai Vs Department Of Income Tax’ decided on 19 April, 2012, the Bombay Tribunal has held that an under-construction flat booked with a builder, under a letter of allotment or an agreement to sale, only represents the right to acquire a flat and if such right is sold after a holding period of more than 24 months, it becomes a long-term capital asset. However, when the possession of flat is taken, the holding period would once again commence from the date of possession.

Calculating holding period of under-construction property 

In case, the decision of your jurisdiction’s high court is not in your favour, please treat both the cases as separate. In case, you wish to sell the flat, try to do so before taking possession if the period of 24 months is already over.

Even in cases like that of Punjab and Haryana (where the scheme of flats allotted under DDA is peculiar and the owner is presumed to be an owner of the flat under the self-financing scheme), the terms and agreement with your builder may be different from the DDA scheme and hence, the owner needs to be extra careful. In case, the facts of your case are identical or almost similar, you can take the risk.

So, if you have booked flats that are under construction and want to sell the same, do so before taking possession in case a period of 24 months has already passed, as litigation can be a costly affair. However, in case the decision has already been taken, shelter under the above-cited court decision can be taken, to salvage the position.

(The author is a tax and investment expert, with 35 years’ experience)

 

FAQs

What is long term holding while computing capital gains?

The holding period would be considered long-term if a property is held for more than two years.

What is the holding period for under-construction property in calculation of capital gains?

While the income tax law is not very clear on this point, decisions by the tax tribunals and high courts offer property sellers some clarity. According to a Bombay High Court order, data of allotment is considered date of acquisition in case of under-construction property for calculation of capital gains.

Which Section of income tax law offers tax breaks on sale of property?

Section 54 of income tax law offers tax breaks on sale of property.

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