How can you claim capital gains exemption on the sale of a redeveloped flat?

• Selling the flat before 3 years may revoke Section 54 exemption
• Short-term gains taxed at slab rate if sold within 2 years
• Long-term gains taxed at 12.5% plus cess if sold after 2 years

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Would the capital gains tax apply to the redeveloped flat, which you took ownership of in 2024 and wish to sell in 2026? Today’s Ask Wallet Wise explains how Section 54F of the Income Tax Act, 1961, applies.

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Our residential flat has been held for more than 35 years. This was redeveloped, and we received possession in October 2024. I want to sell this redeveloped flat in June 2026. Do I have to pay any capital gains tax on the sale of the redeveloped flat?

Expert’s Advice: A residential house property becomes long-term after it has been held for more than two years. Capital gains are computed after reducing the cost of acquisition by any cost of improvement incurred from the sale price. The benefit of indexation for long term capital assets has been withdrawn except for the limited purpose of computing tax liability of a resident individual or HUF in respect of long term capital gains arising from sale of land or building where the taxpayer has the option to lower tax at 12.50 percent on unindexed long term capital gains or at 20 percent on indexed long term capital gains.

With respect to the redeveloped flat, you were entitled to claim exemption under Section 54, and you would have certainly claimed the exemption while filing the ITR for the financial year 2024-2025, as the property being redeveloped is deemed to have been transferred during the year in which the local authority issues the completion certificate. Since you have got a redeveloped flat in exchange for the old flat, you are deemed to have reinvested the full long-term capital gains in the new redeveloped house, which you are required to invest to claim the exemption under Section 54.  The cost of the redeveloped flat will be computed in accordance with the stamp duty valuation of the property on the date of issue of the completion certificate by the local authority.

In case you have availed the exemption under Section 54, you are required to hold the new property for a minimum of three years. In case the flat received under redevelopment is sold by you before completing the mandatory holding period of three years, the cost of the redeveloped flat will be reduced by the amount of long-term capital gains claimed exempt under Section 54. So, if you sell the redeveloped flat within two years of receiving the completion certificate, the capital gains will be short-term. This will include the long-term capital gains exemption claimed earlier by you in the 2024-25 financial year and the appreciation in the value of the redeveloped flat since you took possession.  The short-term capital gains will be taxed at your slab rate.

If you sell the flat after two years from the date of issue of the completion certificate, the appreciation since possession and the earlier-exempt long-term capital gains will be taxed as long-term capital gains at 12.50 percent plus cess and applicable surcharge.

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