Taxation of Sale of Under-Construction Property Before Registration

Buying an under-construction flat or property has become very common in India. But what happens if you decide to sell your rights in that property before registration or possession? Will the gain be taxed as capital gains or as income from other sources?

This question is one of the most debated issues in real estate taxation. Let’s break it down.

Scenario

•  You book an under-construction flat in 2020.

•  Builder issues you an allotment letter and you start paying installments.

•  Registration and possession are still pending.

•  In 2024, you transfer your rights in the property to another buyer.

Now the critical question: How will the profit be taxed?

Tax Department’s Stand

Often, when there is no registered property document, the tax department argues that the transaction does not amount to a “transfer of a capital asset.”
Instead, they may classify it as “Income from Other Sources”, which:

•  Denies you the benefit of capital gains exemptions (u/s 54, 54F, etc.),

•  Prevents you from using indexation benefit,

•  Increases your tax liability significantly.

Judicial View

The Supreme Court and several High Courts have consistently held that:

•  An allotment letter from the builder creates a rightful interest in property.

•  Such rights are considered a capital asset under Section 2(14) of the Income Tax Act.

•  Selling these rights amounts to a transfer of a capital asset u/s 2(47).

Key Judicial Principles:

1.  Sale of rights = Sale of capital asset
Transfer of allotment rights is not “other income” but capital gains.

2.  Holding period counts from allotment

•  If you hold the rights for more than 36 months (24 months for immovable property after amendment) from allotment date → Long-Term Capital Gain (LTCG).

•  Otherwise → Short-Term Capital Gain (STCG).

3.  Exemptions are available

•  You can claim Section 54F (investment in residential property) or 54EC (investment in NHAI/REC bonds), subject to conditions.

Example

•  Flat booked: April 2020 (allotment letter issued).

•  Rights sold: May 2024.

•  Holding period: 4 years (counted from allotment).

– The gain will be taxed as Long-Term Capital Gain (LTCG) with indexation benefit.
– Exemption can be claimed u/s 54F or 54EC.

Conclusion

•  Don’t get misled by lack of registration.

•  Allotment rights in an under-construction property = capital asset.

•  Sale of such rights should be taxed as capital gains (not “other sources”).

•  Holding period starts from the allotment letter date.

This clarity is crucial because it ensures taxpayers can rightfully claim exemptions and reduce unnecessary tax burdens.