Selling inherited property within 2 years after redevelopment attracts slab-rate tax; here’s why

Selling your redeveloped property within two years of possession can attract short-term capital gains tax at slab rates. This rule applies even if you inherited the property from your parents. In today's Income Tax Q&A, we answer a reader's question on this issue in detail.

In the past, the property owners of the property which went for redevelopment used to face difficulty due to a delay in completion of construction. Therefore, the government changed the law relating to exact point of time when the property being redeveloped is deemed to have been transferred for the taxation purpose.

The liability of tax on capital gain arises at the point of time when the transfer takes place. The amended law provides that in case of redevelopment of property owned by an individual and an HUF, the transfer of the house property is deemed to take place when the local authority issues the completion certificate for the redeveloped property.

So in your case, transfer of old inherited property happened in or around October 2023 when the builder presumably had received the completion certificate and handed over you the possession. At this point, you did not have any tax liability due to exemption available under Section 54 as you had received the redeveloped apartment in lieu of the old residential property within the prescribed time period.

The law further provides that the property with respect to which the exemption under Section 54 for long term capital gains was claimed should not be transferred within three years from the date of acquisition.

In case the property is transferred before completion of three years, the cost of the new house gets reduced by the amount of long term capital gains exemption claimed under Section 54.

As you have sold the redeveloped property before completion of two years, the capital gains would be treated as short term capital gains and will be taxed at your slab rate.

For computing the capital gains, you will have to obtain valuation certificate of the property as on April 1, 2001 in case the property was acquired by the original purchaser prior to April 1, 2001. The valuation of such valuer cannot be higher than the stamp duty valuation.

Please note there is no way out now as your sale deed has already been registered. Had the sale deed not been registered, you could have waited for completing of two years and avail the concessional rate of 12.50% on the long term capital gains by executing fresh sale deed.