I had purchased a flat of 700 sq. ft in 1970 for Rs 30,000. The building is being redeveloped. The builder is offering me a new flat in the same building with 50% extra area—1,050 sq. ft. But I have opted for 860 sq. ft and surrendered 190 sq. ft for Rs13.30 lakh. The builder has agreed to pay the amount in six instalments in the next three financial years till I get the possession. What is the tax implication on this transaction?
As far as tax implications arising from property development agreements are concerned, the law is still unsettled. Generally speaking, gains arising from transfer, exchange or relinquishment of a capital asset are subject to capital gains tax. The date on which the sale/transfer takes place is when capital gain arises.
Your transaction is a combination of sale and exchange and, in our view, capital gains will be calculated in two parts.
Part I: Sale of proportionate area in original flat for which you will get Rs 13.30 lakh.
Effectively, you have sold 126 sq. ft area in the original flat [(700 sq. ft/1,050 sq. ft) x 190 sq. ft] for Rs 13.30 lakh. The capital gain shall be the difference between the “full value of consideration” received/receivable and the “cost of acquisition” proportionate to 126 sq. ft of area in the flat sold. Since the flat was originally acquired before 1 April 1981 (for values prior to 1 April 1981, indexation as on 1 April 1981 is taken), the fair market value as on that date will be adopted as the cost of acquisition. Further, indexation benefit shall be available since the asset is a long-term capital asset. Since it will be long-term capital gain, it is possible to claim exemption by investing the amount in eligible assets/investments.
Part II: Exchange of remaining 574 sq. ft (700 sq. ft minus 126 sq. ft) in original flat for a new flat of 860 sq. ft.
The balance 574 sq. ft area in the original flat has been transferred to the builder in exchange of 860 sq. ft in the new flat. Therefore, the value of 860 sq. ft in the new flat would be the “full value of consideration”.
Practically, in case transfer is considered to be at the stage of entering into the redevelopment agreement, it is difficult to determine the full value of consideration since the property is yet to be constructed and hence there is no basis to determine the value. Therefore, exchange would take place only at the stage when the new flat would be ready and the same is made available for use and the relevant documents are executed. The value of capital gain shall be the difference between the “full value of consideration” (which in your case may be the market value of the asset) and “cost of acquisition” proportionate to the area exchanged (574 sq. ft). Since the flat was originally acquired before 1 April 1981, the fair market value as on that date will be adopted. Benefit of indexation shall be available since the asset is a long-term capital asset.
Nitin Baijal , director, BMR Advisors
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