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Long Term Capital Gains Calculation – Real Estate

by | Mar 13, 2016 | Basics, Finance, Taxes

It is my opinion that investment in Real Estate is one of best ways of building long term wealth. There are several reasons for this and will discuss them in future newsletters.

One of the most important points that affect the returns in an Real Estate investment is the calculation of the Capital Gains – whether it is Short Term or Long Term.

In case of an investment in a completed property – one which the Occupation Certificate (OC) has already been received, the law is rather clear. For long term capital gains (LTCG), the condition is that the flat should be held for 3 years from the date of agreement.

The problem is in the case of a residential property which is under construction. From what date does the 3 year period (for LTCG) start?

Typically, there are four crucial dates:
• Date of booking – when 10 – 20% of the cost is paid up.
• Date of Allotment Letter – generally the same as, or within a few days of the date of booking.
• Date of Registration.
• Date of Possession.

I have asked several CAs and almost none of them agree on the interpretation of the law. They are split in their opinion amongst three choices – Allotment Letter date, Agreement date and the Possession date. Most of them preferred the Agreement date.

To make the matter more complex, there are enough court verdicts which are in favour of each of the above dates!!
So, the question boils down to this – What would be a date that would have a reasonable chance of being accepted by the IT officer?

I was given a good explanation by my CA. It is as follows:

When you book a flat and get an allotment letter, what you have is a ‘right to a property’ – there is no actual property. So, if you sell the flat without taking possession of the flat, then the allotment letter date is applicable to calculate the 3 year period for LTCG.

However, as soon as you take possession, the ‘right to a property’ gets converted to an actual physical property. In this case, the clock is reset to zero again and the possession letter date becomes the basis for calculating the 3 year period for LTCG.

In either case, the Agreement date is immaterial.

However, in most cases, the CAs tend to consider the date of Registration. He will consider the date that he himself is most comfortable with. Say, if you ask him to consider the allotment letter date, then he would be worried that if the IT officer disputes it, he will have to spend time convincing him.

So, if you are a Real Estate investor and have invested in ‘under construction’ property, please make it a point to meet your CA and get a clarification on the above. You should be absolutely clear on what date he will consider or else, will end up losing a lot of money to taxes.
Thanks and best regards,

Niranjan Bangera
36 Properties Pvt Ltd
• Real Estate Investors
• Real Estate Brokers
• Mutual Fund Distributors

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Written By: niranjan

Financially Stupid Niranjan


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