I recently had a case (as on May 2017) where I am getting possession of a 3BHK flat at Bangalore within a month or two. Well, normally anyone should be really happy their flat is getting ready to move in, however I was a bit confused as I do not plan to stay there myself.
When I booked the flat in April 2013, I had plans to move in there. However, while it was constructing since all these years, things changed and I got a better deal which I leveraged and now that's what I call my home
 | While acquiring that I tried to sell this one, however could not sell it then as it was still constructing. Anyways …
Now I am getting the possession and have two options:
I was pretty much convinced that I should be selling that after holding period to avoid short term gains, and the key reason for that was I believed the moment I take possession the nature of property changes from "Right to acquire the property" to "actual property". And this would typically reset the counter for tax calculation.
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However, when I posted this in a forum Asan Ideas for Wealth a gentlemen suggested to have a private chat on the topic to discuss. I agreed and we had a call instead, got following arguments against what I believed
- Even though the nature of capital changes, its actually same. As otherwise, how else would you calculate the acquisition cost of the property itself. You always have to account for the transactions that are done for acquiring the right.
- The moment the flat is allotted, builder cannot legally transfer the same to anyone else as you have the right. Unless of course you forfeit the terms of agreement or cancel yourself. And this is the same right for which banks give loans, as this is legally yours and though they can't mortgage right but they eventually would be able to mortgage the property.
- There have been court rulings on this topic, and the view has been "Right to acquire the property" to "actual property" cannot be treated differently for purpose of taxation. You can do some reading by searching on cost of acquisition of under construction flats.
So, what does all this means to me. Booking amount was paid in April 2013 during pre-launch and the allotment of flat with flat number to me was done around Jan 2014. Hence, considering the second date (during first date I did not had flat number) I have completed three years of holding in Jan 2017, which means If I sell now I would make capital gains and not short term gains.
Hence, I decided to sell that (by the way I am yet to sell this, in case you are interested it's at Republic of Whitefield by Divyasree Builders)
To calculate the cost of acquisition, i should proceed as: Calculate the Indexed value of all the installments paid to the builder and add to that following
- Cost of taking loan on the property
- Interest paid till that for the home loan on this property (note, since this was under construction i could have not claimed anything so far)
- Any other cost that can be directlly associated with the acquisition of property
Now, once I would have sold the flat, I can either pay tax on capital gains or try to save them. Saving them would mean any of the following
- By investing in another property, which I would not do in any case
- Buy RECI or NHAI bonds. You can buy a max of 50 lakhs of these bonds and hold them for three years @ 5.25% annually. Though your principal gets tax free, you still have to pay tax on the interest you get from them.
- If you can arrange capital losses, you can set them against capital gains
This summarizes all we discussed. Hope this would be of some help. Post your thoughts or questions in case I have not covered certain aspects of the problem.
By the way, all this confusion was because our tax laws does not clearly indicate what should happen.
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