Buying an under-construction home? Here’s the most tax-efficient time to sell your existing property to get Section 54 benefits

Tax efficient rules for buying under construction property

Expert's Advice: As per Section 54 an individual and an HUF are entitled to claim exemption from long term capital gains arising from sale of a residential house property if such long term capital gains are invested in another residential house property within prescribed time period. In case the taxpayer goes for self-construction or books an under construction property, the law requires that the construction of the house needs to get completed within three years from the date of sale of the existing house property.

Since the under construction property which you are planning to book will get completed by December 2028 which is beyond prescribed three years from today, you will not get the exemption if you sell the existing residential house property today and book the under construction flat now knowing well that the construction will get over beyond three years from today.

Though there are judicial pronouncements allowing such exemption when the completion of the construction was delayed beyond three years without any fault on the part of the assessee but as you know very well at the time of booking of the flat that the construction will get over beyond the period of three years, you cannot argue that the completion of construction was delayed beyond three years for reasons beyond your control. Taking into account probable delay in completion of the construction and to avoid litigation, I would advise you to sell the existing house around June 2026.

Since the benefit of indexation is removed for determining the amount to be invested, you have to invest the amount of plain long term capital gains of Rs 1.46 lakhs in order to avail the exemption. As far as the amount of home loan to be taken is concerned the answer would depend on whether the house to be acquired will be self-occupied or will it be let out. The answer would also depend on whether you opt for old tax regime or new tax regime and the tax benefits for home loan would vary accordingly.

As you have not provided these details I cannot answer the question of quantum of home loan to be taken in detail. The home loans are available at relatively cheaper rates as compared to other loans, I would advise you to keep some funds to meet emergency in near future and not to commit entire funds to this purpose. If you can deploy the funds yielding you better returns as compared to interest rate on home loan, in the long run, you can decide to go for maximum amount of home loan available.

Please note that it is not necessary to actually invest the same funds as received from sale of the house in order to claim the exemption. You can still claim this exemption in full as long as the cost of the under construction residential house is equal to or more than the amount of plain long term capital gains.

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