Capital gains tax is payable on share or cash received in redeveloped house

  • After the redevelopment of a property, if the owner gets either a share in the redeveloped property or cash or both, his gain is a taxable capital gain
  • At the time of receipt of possession in 2008, the transaction was subject to LTCG tax (as the property was held for more than 36 months)

My mother inherited a flat (in a redeveloped building). We sold it in February 2019. In 2001, it was part of a chawl. We got its possession in 2008 and the agreement was made in 2014. In the chawl system, the carpet area was around 100 sq.ft; after redevelopment, the area was 225 sq.ft. Which area will be considered for calculating the fair market value or indexed cost in 2001? How will it get taxed?

—Sheetal

After the redevelopment of a property, if the owner gets either a share in the redeveloped property or cash or both, his gain is a taxable capital gain event similar to the gain from the sale of a property. The law and timing of taxation in such arrangements was clarified in 2017, when a specific provision stated that taxability is triggered in the year in which the redevelopment is completed (and a certificate of completion issued by the competent authority). Accordingly, at the time of receipt of possession in 2008 (assumed FY09), the transaction was subject to long-term capital gains (LTCG) tax (as the property was held for more than 36 months). To calculate LTCG, the stamp duty value on the date of issue of such certificate as increased by any cash consideration was to be taken as the sale amount. Further, the cost of acquisition in 2001 could have been indexed to arrive at taxable LTCG, subject to exemptions towards reinvestment of such LTCG. We presume that you offered capital gains to tax at the time of possession of the redeveloped property in 2008.

Now at the time of sale of the redeveloped flat, after holding it for more than 24 months, the gain on sale would be treated as LTCG and indexation benefit can be claimed towards the cost of acquisition, which in this case will be substituted by the sale amount considered for computing LTCG in 2008. The indexed cost of acquisition would then be calculated as the cost of acquisition (as mentioned above) divided by the cost inflation index (CII) of FY09 (i.e. 137) multiplied by CII of FY19 (i.e. 280).

Exemptions from LTCG reinvestment can be separately evaluated.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India

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