Selling under-construction property before possession? Know the tax and home loan implications

Many homebuyers choose to exit residential projects while they are still under construction. They do it often to book profit amid rising property prices or due to personal reasons.

This article explains the nuances that you should know when planning to sell an under-construction property before possession.

The sale of a property before possession is legally treated as the transfer of rights in a property rather than a sale of the property itself, according to CA Hita Shah, Associate Partner, NPV & Associates LLP.

The tax expert says while selling an under-construction property before possession, you should consider the following two key aspects:

• Loan settlement
• Tax implications

Let's look at the two key aspects in detail.

How would the loan settlement take place?

There are two common ways to handle the home loan in such a case:

The buyer may apply to take over the existing loan. In this case, the bank will evaluate the buyer’s creditworthiness and, upon approval, transfer the loan in the buyer's name.

This process of loan takeover by the new buyer may help save processing charges and streamline the transaction.

After the loan is transferred to the new buyer, you should also take a no-objection certificate (NOC), which will be required for registration.

"The bank will issue a No Objection Certificate (NOC) to the seller, which is generally required before property registration," says Shah.

The buyer may pay the agreed purchase price directly to the seller. The seller can then use the funds to prepay the outstanding loan and obtain a NOC from the bank. Once the liability is cleared, the seller can legally transfer rights to the new buyer.

What will be the tax implications?

Since possession has not been received, it is treated as a transfer of rights to acquire the property, not a sale of an actual asset, according to Shah.

For taxation of capital gain, the holding period will be calculated from the date of allotment by the builder and taxed as follows:.

Some more points to note

Apart from the above, you should take note of the following key points when selling an under-construction property taken on a home loan, according to Shah.

• Only the principal amount paid (excluding EMI interest) is treated as the cost of acquisition.
• Since the asset transferred is a right, tax exemptions under Section 54, 54EC, or 54F are not applicable.
• Builder consent and transfer charges may apply. Review the builder-buyer agreement carefully.
• Some agreements prohibit or restrict transfers before possession or impose transfer fees.