Your Taxes

In 2014, my daughter, who is an NRI, booked a flat by entering into an agreement to construct and sell with the builder/developer, and made payments in stages as follows:

Up to March 2015: ₹20.75 lakh; March 2016: ₹24.14 lakh; March 2017: ₹21.07 lakh; March 2018: ₹21.33 lakh; March 2019: ₹14.22 lakh; after March 2019: ₹6 lakh (final payment). Total payment: ₹106.51 lakh. All the payments are reflected in her 26AS (TDS returns). Now, before the registration of the property in her name, she is planning to dispose the property (through the builder/developer), and the estimated sale consideration to be received is ₹150 lakh. Please clarify whether the profit to be earned can be considered long-term gains for payments made till March 2017, and the rest as short-term gains.

K Govind

As per the provisions of Section 2(14) of the Income Tax Act, a right in a property is considered a capital asset. Accordingly, the right to obtain conveyance in an immovable property shall constitute a capital asset, and the sale/transfer of such a right shall be liable to be taxed as capital gains.

As your daughter entered into an agreement with the builder/developer in 2014 for the construction of the property and on an understanding that an allotment letter would be issued to her, the period of holding of such a right in the property may be considered from 2014. Such inference can be drawn based on available judicial precedents. Such proportionate right may be construed to be available from the date of the respective payments made.

Accordingly, the period of holding of such a right shall be required to be seen from the date of payment to the date of sale of the right. Hence, for payments made more than 36 months (and not 24 months which is to be seen for sale of an immovable property) prior to such sale shall be considered to be sale of a long-term capital asset and hence a long-term capital gain/loss. Else, it shall be considered a sale of short-term capital asset and hence a short-term capital gain/loss. So, if the right in the property is being sold now (say, June 2019) and based on the payment schedule, payments made up to March 2016 shall be sale of a long-term capital asset and the balance shall be considered to be sale of a short-term capital asset. You may note that this may be litigated by the tax authorities, especially at lower levels.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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