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Unsold flats of builders attracts tax on notional basis

Chartered Accountant

Notional taxation in the case of builders & developers would not be applicable up to one year from the end of financial year in which certificate of completion is obtained from the competent authority.
Unsold flats of builders attracts tax on notional basis
Query 1]
I am a public sector employee; net taxable income from salary is around Rs. 19 lakh/ annum. A plot of open Residential land was purchased by me in the name of me and my wife in Oct-2008 at Rs. 4.13 Lakh is under sale and sale deed will be signed in Sept-2017. The Govt. rate of this land is around Rs. 45 Lakh as of now whereas actual sale consideration is only Rs. 30 Lakh, out of which Rs. 2.40 Lakh will be paid as brokerage.
I have already booked an under construction flat in May-2017 in my and my wife's name. Total cost of this flat is Rs. 43 Lakhs to be paid in installment say by May-2019. Total amount paid for flat till this day Rs. 23 Lakh (Self Rs. 5 lakhs and Rs. 18 Lakhs bank loan). Bank loan sanctioned is Rs. 32 Lakh. I have another flat in my name at Naya Raipur purchased by Home loan from cos. scheme but income tax rebate not claimed. Flat is lying vacant.
1. Is the sale proceeds/ gain out of sale of plot is eligible for LTCG?
2. If yes, do the amount (gain or total) needs to be actually invested in the future payments of flat? Do I need to repay the home loan amount which has been disbursed till date? I want this money to be used for some personal expenditure.
3. If not, what are other options? []


1.      Long Term Capital Gain (LTCG) tax arising to individual/ HUF from transfer of any capital assets (other than residential house property) can be saved if the taxpayer purchases of another residential house property within a prescribed period. The prescribed time periods are as under:
a] For purchase:
One year before or two years after the date of sale.
b] For Constructions: 
Three years from the date of sale.
2.      You are selling a plot in September- 2017 for Rs. 30 Lakh (Government valuation Rs. 45 Lakh) & buying another house property within prescribed time period. Purchase price of the new flat (Rs. 43 Lakh) is exceeding the net sale consideration [Rs. 27.60 Lakh i.e., Rs. 30 Lakh less Rs. 2.40 Lakh] for purchase of flat within 2 years (i.e., before Sept-2019). As a result, entire amount of LTCG on sale of plot would be exempt from tax u/s 54F. Section 54F stipulates mere investment for claiming an exemption and live nexus of fund is not needed. Even though the borrowed fund is invested, still exemption would be admissible. In your case, even if the sale consideration is not utilized towards the repayment of the existing loan, still exemption would be available.
3.      You need to ensure that investment in the new house property before 31st July 2018 (i.e., the due date of filing income tax return for the AY 2018-19) exceeds the amount of net sale consideration of Rs. 27.60 Lakh & the sale deed of the property is executed within 2 years from the date of sale of your plot.
  1. One more stipulation u/s 54F is that the taxpayer should not be owner of more than one house property, other than the new asset, on the date of transfer of the original asset. In your case, you own only one house property (in September-2017) and so you are satisfying the stipulation of section 54F.
  2. A word of caution:
    a] Exemption u/s 54F would be withdrawn if the taxpayer purchases any other residential house within a period of 2 year after the date of transfer of the original asset or construct any residential house other than the new asset within a period of 3 years after the date of transfer of the original asset.
    b] There is a condition that the property purchased/constructed for exemption u/s 54F should not be transferred within a period of 3 years.
Query 2]
I am a pensioner and have income of about Rs. 4 lakh p.a. I had purchased 0.25 Acre of agricultural land around 30/32 years back. Now, the area has developed as a residential colony and people are living from the last 10/12 years. Now, I am in the process of getting all necessary approvals for developing thereon a Multi unit project for about 20 units of 4BHK type by forming a proprietorship firm in my name. So far, I am incurring all expenses on my own. But, construction of the building cost is proposed to be met by booking amount from the purchasers & if not sufficient then by raising loans/ contributing from my side. Now, please advise me
  1. If 10 units (for example) are sold off then it would be sufficient for me to meet out the expenses of the construction of the building. I wish to hold the remaining 10 units as unsold inventory of the firm (units may be used for rental/personal/vacant position). What will be the Income tax impact of the firm for these 10 unsold units?
  2. Will it be wiser decision to hold? At this stage of age, I don't want to take risky steps on my investment.
Please let me know of your valuable and useful views with pros and cons at the earliest. [S.K.Mallick, Bhopal-]


1.      The tax liability on sale of the units will arise as and when the same are sold. If you sale none of the unit, no tax liability would arise. For example, if out of 20 units to be constructed by you, if you sale only 5 units & 4 units in the FY 2018-19 & 2019-20, the tax liability would arise on 5 units & 4 units only in the FY 2018-19 & 2019-20 respectively. If you retain 10 units for investment purpose or for rental income purpose then no tax liability would be there (like in case of sale of 5 units or 4 units) as there is no business or capital gain income.
2.      Holding of more than one residential unit attracts taxation on notional basis i.e., the tax is payable whether or not actual income from such unit is there. Under the Income Tax Act-1961, if any taxpayer owns more than one house  property, then taxpayer  has a choice of choosing anyone house property as self occupied house property and remaining house property shall be deemed to have been let out.  The above legal provision will be applicable even in the case of builders who are holding more than one house properties as stock in trade or as an investment. However, the notional taxation in the case of builders & developers would not be applicable up to one year from the end of financial year in which certificate of completion of construction of property is obtained from the competent authority. After one year from the end of the financial year in which certificate of construction of property is obtained by the developer/builder, unsold flat will be liable for taxation in respect of its rental value whether or not it is actually let out.
3.      In your specific case, even though nothing would be taxable as business profit or capital gain income in respect of 10 flats to be retained by you but its rental value (whether actually let out or remained vacant) will be taxable in your hands.
4.      Tax planning Tool:
a] You are converting your personal capital assets in to business assets. You can first convert your capital assets in to “stock in trade”. As a result of this, the difference between the fair market value of assets on the date of such conversion & your indexed cost of acquisition would be treated as Long Term Capital Gain (LTCG) which is taxable @ 20%.
b] Further, since the assets was acquired by you prior to 01.04.2001, you can take the fair market value of the land as on 01.04.2001 as your cost of acquisition. As a result, the increment in the value of the assets from the date of acquisition to 01.04.2001 will not have any tax implications.
c] The best part is that the tax on such LTCG will be payable not on the date of conversion but on the date of sale of units constructed thereon.  For example, if in any year you sale 5 flats only then LTCG of such flats area would only be payable.  The fair market value of the assets on the date of conversion will be treated as cost for the purpose of computing business profit from your builder-ship business.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at]

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