What tax applies if you sell a redeveloped flat soon after possession and invest in mutual funds

Selling a redeveloped property immediately after possession could lead to short-term capital gains taxed at your slab rate. In this Q&A, CA Dr Suresh Surana answers the query of a reader who wants to sell his redeveloped property immediately after possession and invest the sale proceeds in mutual funds.

A “specified agreement” refers to a registered arrangement where the owner of land or building permits a developer to undertake a real estate project on such property in exchange for a share in the developed project, with or without any additional monetary consideration.

While, in substance, the transfer of property is regarded as having taken place when possession is handed over to the developer, Section 45(5A) provides a deferment mechanism for taxation.

Accordingly, capital gains are chargeable to tax in the year in which the completion certificate for the whole or part of the project is issued by the competent authority, rather than in the year of handing over possession.

In such situations, the determination of the period of holding assumes significance at two distinct stages:

• First, the period commencing from the date of acquisition of the original asset up to the date of its transfer to the developer; and

• Second, the period beginning from the date of issuance of the completion certificate and extending up to the date of subsequent sale of the redeveloped property.

Consequently, where a redeveloped flat is sold immediately upon possession (post issuance of the completion certificate), the period of holding is computed from the date of the completion certificate to the date of sale. Since this period would typically not exceed 24 months, the asset would qualify as a short-term capital asset under Section 2(42A), and the resulting gains would be taxable as short-term capital gains.

Such short-term capital gains are taxed at the applicable slab rates for individuals, with the maximum marginal rate being 30%, plus applicable surcharge (if any) and health and education cess at 4%. It is also pertinent to note that reinvestment of sale proceeds in mutual funds does not qualify for any exemption under the Act.