Capital gains in real estate: Resolving acquisition and reinvestment ambiguities to ease litigation

In order to compute capital gains on the sale of property, there is predominant consensus in HC/ITAT judgments on treating the date of the Allotment Letter or registration of the Agreement for Sale as the acquisition date and the date of registration of the Agreement for Sale or Sale Deed as the sale date.

It was encouraging to witness the responsiveness of the exchequer in considering and incorporating our recommendation for Budget 2024 by providing win-win taxation options of 12.50% (without indexation) or 20% (with indexation) on realty long-term capital gains. In continuation of our efforts to make recommendations for a collaborative approach between the exchequer and taxpayers, this time we address areas on the taxation of LTCG on houses where diverse interpretations and judgments at various tax and judicial levels, as well as interpretations by taxpayers, have been leading to prolonged litigation lasting 5–10 years. This situation consequently burdens the precious resources of all involved. These areas, in relation to house property, pertain to the interpretation of the date of acquisition and the date of sale for computing the holding period and long-term capital gains (Section 48), as well as the dates of investment or reinvestment of sale proceeds or long-term capital gains to avail exemptions under Sections 54 and 54F.

The key dates relevant for taxation incidences, as per widely prevalent and practical market practices, can generally be understood as follows. For incidences of acquisition over 1–5 years for new or under-construction properties: (1) Booking a house, where the acquirer pays a token amount; (2) issuance of an allotment letter specifying the floor or number with the payment of a material amount; (3) registration of the Agreement for Sale under RERA, creating a contractual obligation; (4) progress of construction over 1–5 years based on the payment schedule in the Agreement for Sale; (5) milestones such as Sale Deed registration, occupancy certificate, etc.; and (6) formal handover of possession to the acquirer. For incidences of acquisition or sale of constructed and ready properties: (1) an initial handshake, where the acquirer pays a token amount; (2) registration of the Agreement for Sale with or without full payment, creating an obligation; and (3) registration of the Sale Deed, especially for loan-financed purchases. These incidences are relevant for both capital gains from sales and exemptions through reinvestment of capital gains or sale proceeds.

In order to compute capital gains on the sale of property, there is predominant consensus in HC/ITAT judgments on treating the date of the Allotment Letter or registration of the Agreement for Sale as the acquisition date and the date of registration of the Agreement for Sale or Sale Deed as the sale date. This leaves limited scope for ambiguity. However, interpretations related to exemptions under Sections 54 and 54F, particularly for investment or reinvestment in under-construction properties, remain diverse and often lead to perverse outcomes, defying common sense and universal practices.

Practically, a homeowner who owns a single house, as is the case for the vast majority, typically books a new under-construction house and sells their old house around or after taking possession of the new house, which may take 4–5 years. A homeowner can generally think of selling their old house only when the new under-construction house is ready to move into. However, in some interpretations, the acquisition date for the under-construction house is considered to be the date of registering the Agreement for Sale and not the date of possession. Under such interpretations, the thresholds for purchasing the new property one year before or two years after the sale of the old property, or completing construction within three years of the sale, are neither practical nor feasible, leading to disputes.

The author recommends that the Honorable Finance Minister consider adding a clarification to treat the date of possession as the date of acquisition for under-construction properties under Sections 54 and 54F. Additionally, they suggest reviewing the quantum of existing litigation on Section 54 and related exemption regimes for realty LTCG and applying the proposed clarification to all pending litigation on the subject. Furthermore, the issuance of a comprehensive circular or FAQ defining acquisition and sale dates based on common points of dispute in pending litigation would provide taxpayers with educated guidance. Such measures would unarguably benefit the exchequer by saving human and financial resources on protracted litigation and provide taxpayers with certainty and peace of mind. Adding this clarification either via enactment in the upcoming budget or through a comprehensive circular—or both—would undoubtedly be a win-win solution for all stakeholders.

Bharat Kailash Banka is a corporate and private equity professional and an angel investor

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