Redeveloping your house with a builder? Here’s how tax rules work if you get additional floors

Tax rules relating to redevelopment of property

• Capital gains taxed in year completion certificate is issued.
• Exemption under section 54 or 54F possible if conditions met.
• Professional advice needed for redevelopment agreement wording.

Did our AI summary help?

The Ask Wallet-Wise initiative offers expert advice on personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try to get a top financial expert to address them.

I own a building with two floors and all our family members live in it. We are going for redevelopment of the building. The builder will construct five floors and give us two. Neither we will pay anything to the builder nor the builder will pay us anything in cash. What are the tax implication of this redevelopment for us?

Expert advice: Generally, capital gains arise during the year in which transfer of the capital asset takes place. The income-tax act offers certain exceptions to this general rule. Section 45(5A) says that capital gains arising from transfer of land and building for redevelopment by an individual and an HUF shall be charged to tax in the year in which the completion certificate for the project is issued by the competent authority.

What you are transferring is your proportionate right in the land for the relatable portion of three floors and your sale consideration for this is the construction cost of the two floor received in lieu to transfer of your rights in the land.

Section 54 and 54F provide for exemption to individual and HUF for long term capital gains (LTCG) if the taxpayer makes investment in a residential house property within prescribed time period. Section 54 applies where the LTCG arise from transfer of a residential house property and the long-term capital gains are invested for acquiring another residential house. Section 54F applies for LTCG on transfer of a capital asset other than a residential house property if the tax payer invests the net sale consideration for acquiring a residential house.

For ready-to-move house, the investment in another house has to be made within two years. For a house bought within a year prior to the date of transfer of the capital asset, the exemption can still be claimed. If you wish to construct a house yourself or book an under-construction house, construction of the house needs to get completed within three years from the date of transfer/sale of the capital assets to avail the exemptions.

Since you are going for redevelopment of your house and the capital gains are deemed to arise in the year in which the redeveloped project is completed, you are deemed to have complied with the condition of completing construction within three years from the date of transfer of the capital assets.  Since you are deemed to have invested full consideration for acquiring the residential property against transfer of proportionate share of your land, you do not have any tax liability. You can claim exemption under section 54 or 54F depending on how the redevelopment agreement is worded.

Since you are acquiring two floors in exchange of your right in the land and since, as law requires you to acquire one residential house property to claim the exemption, the I-T department may contend that you have bought more than one residential houses. The exemption will be available only if you are able to establish that the two floors will constitute a single residential unit for the family. There have been tribunal decisions holding that more than one floors in a residential building still constitute a residential house.

Taxation of redevelopment is a very complex subject and has huge monetary implications so it is strongly recommended that you take professional help for drafting the redevelopment agreement and for understanding its tax implications. Final taxation would depend on how the redevelopment agreement is worded.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to consult certified experts before making any investment decisions.