Selling a House to Buy an Under-Construction Flat? The "Timing" Trap You Must Avoid

For many property sellers, the most logical next step is reinvesting the profits into a new, modern home to save on Long-Term Capital Gains (LTCG) tax. Under Section 54 of the Income Tax Act, this is a perfectly valid strategy. However, there is a catch that often catches investors off guard: the timeline.

While buying a ready-to-move-in home is straightforward (you have a two-year window), booking an under-construction apartment brings a stricter, more complex set of rules. A delay by your builder isn't just an inconvenience—it could cost you lakhs in taxes.

Here is what you need to know to protect your tax exemption when upgrading to an under-construction property.

The "3-Year Rule" is Non-Negotiable

The Income Tax Department is clear: if you are claiming an exemption under Section 54 by constructing a new house, the construction must be completed within three years from the date of selling your old property.

This is where the distinction between "buying" and "constructing" blurs.

• Ready-to-Move: You have 2 years to purchase.
• Under-Construction: The courts and tribunals often treat booking an under-construction flat as "construction." Therefore, the builder must hand over possession (complete the construction) within the 3-year window.

The Risk: If you sign an agreement where the scheduled completion date itself is 4 or 5 years away, the tax officer may deny your exemption upfront. The agreement must ideally show a completion date within the 3-year limit.

What If the Builder Delays?

This is the most common nightmare for Indian homebuyers. You booked a flat with a promise of delivery in 2.5 years, but the project drags on for 4 years. Who pays the tax?

Strictly speaking, if the project is not complete within 3 years, the exemption can be withdrawn. However, legal precedents suggest that if the delay is genuinely out of your control (and the developer's fault), you may still argue your case.

• RERA Dates Matter: Always check the RERA possession date. If the RERA deadline exceeds your 3-year tax window, you are taking a significant risk.
• Documentation is Key: Don't just rely on the builder's word. Ensure the Agreement for Sale specifies a date within your tax timeline. If the builder gets an official extension from authorities, that documentation can help you defend your case during a tax scrutiny.

The "Plan B": Capital Gains Account Scheme (CGAS)

You cannot simply keep the profit in your savings account while waiting for the builder to demand payments. If you haven't utilized the entire capital gains amount by the time you file your Income Tax Return (usually July 31st), you must park the unutilized money in a Capital Gains Account Scheme (CGAS) at a public sector bank.

This serves as proof to the tax department that the money is earmarked for the new property. You can then withdraw from this account to pay the builder as construction milestones are met.

Strategies to Safeguard Your Exemption

If you suspect the project won't finish in time, or if you are already close to the deadline, consider these backups:

1. Section 54EC Bonds: If you are within 6 months of selling your old house, you can invest up to ₹50 lakh in bonds issued by NHAI or REC. This is a risk-free way to save tax, though the lock-in period is 5 years.
2. Switch to Ready-to-Move: If the under-construction deal looks risky or the timeline is too tight, buying a resale or ready property within 2 years is a safer bet for tax purposes.
3. Completion Certificate (CC): Ultimately, the tax officer looks for the Completion Certificate or possession letter. Ensure you chase the developer for these official documents rather than just relying on the "key handover."

Final Thought: Tax planning isn't just about where you invest, but when the investment matures. When dealing with under-construction properties, always keep a buffer in your timeline. A delay in construction shouldn't become a delay in your financial freedom.

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