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Business News/ Money / Personal Finance/  Possession of a plot given but sale deed not executed. Income tax rule explained
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Possession of a plot given but sale deed not executed. Income tax rule explained

Since you have handed over possession of the plot to the buyer under the agreement to sale, for the purpose of income tax laws, the transfer has taken place. So you have would be liable to pay tax in the FY 2022-23 in spite of the fact that the sale deed has been yet been executed and registered

You can claim exemption under Section 54EC by investing the indexed LTCG in capital gains bonds of specified entities like REC, NHAI, PFC or IRFC within 6 months from the date of transferPremium
You can claim exemption under Section 54EC by investing the indexed LTCG in capital gains bonds of specified entities like REC, NHAI, PFC or IRFC within 6 months from the date of transfer

I had purchased a plot of land in 1996.  I have agreed to sell the same and have received the entire sale consideration in January 2023 under an agreement of sale.  The buyer was handed over possession of the plot in January 2023 itself and has commenced construction of a bungalow on the plot. Please note that no sale deed has yet been executed.  Can this be treated as sale in FY 2022-23, under Income Tax Act for the purpose of capital gains calculation or Will it be liable to capital gains tax again when the sale deed is executed and registered in FY 2023-24? For capital gains tax saving reinvestment what is the period available and when will it commence?

As per the present Income-tax provisions, any profits or gains arising from transfer of a capital asset during a financial year is chargeable to income tax in that financial year subject to a few exceptions. Handing over of possession of any immovable property to the transferee in part performance of any contract is also treated as transfer as per section 2(47) of the Income Tax Act. Since you have handed over possession of the plot to the buyer under the agreement to sale, for the purpose of income tax laws, the transfer has taken place.  So you have would be liable to pay tax in the FY 2022-23 in spite of the fact that  the sale deed has been yet been executed and registered.  Once this has been taxed in one year, it will not be taxed again in the year in which the sale deed is executed and registered.

As the plot was held by you for more than 24 months before transfer, any profit on sale of it shall be treated as long term capital gains. On such long term capital gains either you can pay tax at flat rate of 20% on indexed capital gains or claim exemption under Section 54F and/or Section 54 EC. Under Section 54F you need to invest the net sale consideration for purchase or construction of a residential house. The purchase can be made one year before or two years after the date of sale of the plot. The construction of a house needs to be completed within a period of three years from the date of transfer of the plot. Any amount remaining unutilized before the due date of filing of your income tax return has to be deposited in a capital gains account with specified banks. The amount deposited can be utilized for the purpose of buying or constructing the house within specified period.

Alternatively, you can claim exemption under Section 54EC by investing the indexed long term capital gains in capital gains bonds of specified entities like REC (Rural Electrification Corporation), NHAI (National Highway Authority of India), PFC (Power Finance Corporation) or IRFC (Indian Railway Finance Corporation) within 6 months from the date of transfer.  The period will begin from the date on which you handed over the possession of the plot to the buyer.  Please note you can invest only maximum upto 50 lakhs to save long term capital gains for a year even spread over two year. Likewise maximum amount which you can invest in these bonds in one year is restricted to 50 lakhs in a year.

Balwant Jain is a tax and investment expert and be reached on jainbalwant@gmail.com and at @jainbalwant on his Twitter handle.

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Published: 30 Jan 2023, 04:57 PM IST
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