3 yrs completion crucial for navigating LTCG tax uncertainty

13 Feb 2024 CW Team

Experts advise that housing societies include a stipulation in their agreements with builders, ensuring that the redevelopment project is concluded within three years. Beyond this timeframe, the income tax department may impose long-term capital gain tax obligations.

Conversely, some experts argue that taxpayers should not be held accountable for delays caused by developers.

Sandeep Trivedi, a member of the Housing Apartment Redevelopment Federation, expressed, "Many societies opt for redevelopment, but members are uncertain about the LTCG impact. Some experts assert that the project must be completed within three years for LTCG exemptions, while others contend that redevelopment deals are exempt from LTCG altogether. Additionally, we urge the state government to grant stamp duty exemptions for redevelopment."

Tax expert Mukesh Patel explained, "Under Section 54 of the Income Tax Act, LTCG exemptions apply if a house property is purchased within three years of selling the old house, a provision that can extend to redevelopment. In such cases, the cost of the old house, adjusted for indexation, and the price of the new house at the agreement date are considered, potentially leading to LTCG tax demands by the income tax department. However, homeowners can argue that they have entered into a development agreement with the builder, absolving them of liability for delays. To ensure security, society members should insist on a clause specifying project completion within 36 months in the agreement."

CA Jainik Vakil, chairman of GCCI direct tax committee, reassured, "If a redevelopment project exceeds the 36-month limit, LTCG issues may arise, but members need not overly concern themselves. Such deals often lack consideration, and there are various court judgments supporting homeowners."

Amidst the increasing trend of residential properties undergoing redevelopment, both homeowners and developers grapple with uncertainty regarding the applicability of long-term capital gain (LTCG) tax to such projects. Experts advise that housing societies include a stipulation in their agreements with builders, ensuring that the redevelopment project is concluded within three years. Beyond this timeframe, the income tax department may impose long-term capital gain tax obligations. Conversely, some experts argue that taxpayers should not be held accountable for delays caused by developers. Sandeep Trivedi, a member of the Housing Apartment Redevelopment Federation, expressed, Many societies opt for redevelopment, but members are uncertain about the LTCG impact. Some experts assert that the project must be completed within three years for LTCG exemptions, while others contend that redevelopment deals are exempt from LTCG altogether. Additionally, we urge the state government to grant stamp duty exemptions for redevelopment. Tax expert Mukesh Patel explained, Under Section 54 of the Income Tax Act, LTCG exemptions apply if a house property is purchased within three years of selling the old house, a provision that can extend to redevelopment. In such cases, the cost of the old house, adjusted for indexation, and the price of the new house at the agreement date are considered, potentially leading to LTCG tax demands by the income tax department. However, homeowners can argue that they have entered into a development agreement with the builder, absolving them of liability for delays. To ensure security, society members should insist on a clause specifying project completion within 36 months in the agreement. CA Jainik Vakil, chairman of GCCI direct tax committee, reassured, If a redevelopment project exceeds the 36-month limit, LTCG issues may arise, but members need not overly concern themselves. Such deals often lack consideration, and there are various court judgments supporting homeowners.