Under-Construction Property Capital Gains: When Does the Holding Period Start?
TL;DR
- For an under-construction property, the holding period for capital gains purposes starts from the date of allotment letter, not from possession or registration.
- Selling the right to acquire (transferring an allotted-but-unregistered flat) is a transfer of a capital asset under Section 2(14).
- Holding for more than 24 months from allotment makes the gain long-term, taxed at 12.5% under Section 112 (or 20% indexed for resident individuals on pre-July 2024 allotments).
- Section 54 exemption is available if you reinvest in another residential house within prescribed timelines.
- Cost of acquisition includes all instalments paid plus stamp duty, registration, and brokerage.
- Capital gains arise even if possession has not been delivered, as long as transfer rights have changed hands.
What this means in plain terms
You booked a flat in 2020 paying Rs. 30 lakhs as initial booking, with possession promised in 2024. By 2026, the project is still incomplete, and you want to sell your allotment rights to another buyer. The new buyer pays you Rs. 95 lakhs for the right to take possession when ready. Is this a capital gain?
Yes. The Supreme Court and CBDT have consistently held that an allotment letter creates a transferable right, and selling that right is a transfer for capital gains purposes. The good news is that the holding period for tax purposes runs from the allotment letter, not from possession. So if you held the allotment for more than 24 months, the gain is long-term and taxed at the friendlier rate.
Holding period rules
Allotment letter as starting point
The Bombay High Court in Vembu Vaidyanathan and CBDT Circular No. 471 of 1986 (further clarified in 672 of 1993) confirm that the date of allotment letter, not the date of registration or possession, is the starting point of holding for capital gains purposes. The allotment creates a right that is itself a capital asset.
What qualifies as an allotment letter
A formal allotment letter issued by the builder identifying the specific unit, payment schedule, and approximate possession date qualifies. A mere expression of interest, EOI, or refundable booking does not. The allotment must give you a vested right to a specific unit, even if conditional on payments.
Counting 24 months
For sales on or after 23 July 2024, the holding period to qualify as long-term is 24 months. From allotment letter to date of transfer (sale of rights or registration) must exceed 24 months. Earlier sales required 36 months; the threshold was reduced to 24 months from FY 2017-18.
Registration date is irrelevant for holding
Even if your registration happens at year 5 and you sell at year 6, the holding period is 6 years from allotment, not 1 year from registration. This is taxpayer-friendly and resolves many under-construction transactions to long-term status.
What constitutes "transfer"
Sale of allotment rights
Selling your allotment rights to another buyer before registration is a transfer under Section 2(47). The consideration received minus your cost (instalments paid plus charges) is the capital gain.
NOC and tripartite agreement
The transfer typically requires the builder's NOC and a tripartite agreement among you, the new buyer, and the builder. The builder usually charges a transfer fee. Document the transfer through a written assignment deed.
Registration in builder's name first
In some states, the practice is for the builder to first register in your name and then immediately register a sale to the new buyer. This creates two transfers and possibly two stamp duty hits, but the capital gains computation is the same.
Cancellation versus transfer
If you simply cancel your booking and the builder refunds your money (minus cancellation charges), this is not a transfer for capital gains purposes. The cancellation charge is a loss but not a tax-deductible loss in most cases; the refund of your principal is not income.
Cost computation specifics
All instalments included
Your cost of acquisition is the sum of all instalments paid to the builder including booking amount, demand-linked payments, and final payment. Maintain receipt records for each payment.
Stamp duty and registration
Stamp duty and registration fees paid by you, if any (sometimes paid by builder, sometimes by buyer), form part of cost. If paid at the time of transfer of rights, also includes any transfer/assignment stamp duty.
Builder charges and brokerage
Maintenance deposit, club fees, parking charges, and brokerage paid for the original booking all qualify as cost of acquisition. Brokerage paid for the resale (transfer) is deducted as a selling expense.
Interest on home loan
Interest paid on home loan during the construction phase that was not claimed as a deduction under Section 24(b) can be added to cost of acquisition. If already claimed as deduction, it cannot be double-counted.
A real example
Sneha, 38, Rs. 26L CTC, Pune, booked an under-construction flat in Hinjewadi in June 2021 for Rs. 65 lakhs. She paid Rs. 8 lakhs as booking, Rs. 25 lakhs in instalments till March 2024 (total Rs. 33 lakhs paid). The project got delayed. She decided to exit in November 2025, selling her allotment rights to another buyer for Rs. 78 lakhs.
Step 1: Holding period: June 2021 to November 2025 = ~53 months. Long-term qualifying.
Step 2: Cost of acquisition: Rs. 33 lakhs paid to builder + Rs. 50,000 stamp duty on assignment + Rs. 1 lakh brokerage on original booking = Rs. 34.5 lakhs.
Step 3: Selling expenses: Rs. 78,000 brokerage on resale + Rs. 1.5 lakh transfer fee charged by builder = Rs. 2.28 lakhs.
Step 4: Net sale consideration = Rs. 78,00,000 minus Rs. 2,28,000 = Rs. 75,72,000.
Step 5: LTCG (without indexation, the only option since allotment is post-July 2024 rules apply to new buyer; but allotment was June 2021 so transitional choice exists for Sneha as a resident individual). She computes both ways and picks the lower.
Step 6: Without indexation: gain = Rs. 75,72,000 minus Rs. 34,50,000 = Rs. 41,22,000 at 12.5% = Rs. 5,15,250. With indexation (CII 2021-22 = 317, CII 2025-26 = 376): indexed cost = Rs. 34,50,000 × 376/317 = Rs. 40,92,000. Indexed gain = Rs. 34,80,000 at 20% = Rs. 6,96,000. The 12.5% method is better; Sneha pays Rs. 5,15,250 plus 4% cess.
What to do this week
- Locate your original allotment letter and verify the date; this fixes your holding period start.
- Compile all payment receipts to the builder to establish total cost of acquisition.
- If selling before possession, get the builder's NOC and confirm transfer fee in writing before negotiating the resale price.
- Compute LTCG both ways (12.5% flat and 20% indexed) if your allotment was before 23 July 2024 and you are a resident individual.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Is the holding period from allotment or from possession?
From allotment. CBDT Circulars 471 (1986) and 672 (1993) confirm that the allotment letter creates a transferable right that is itself a capital asset. Holding period runs from allotment.
What if my allotment letter has no specific unit number?
You need a specific unit identification (block, floor, flat number) for the allotment to create a vested right. A generic "allotted in this project" letter without unit details may be treated as an EOI rather than an allotment.
Can I claim Section 54 exemption on the sale of allotment rights?
Yes. The sale of allotment rights to a residential house is treated as the sale of a residential house, so Section 54 reinvestment in another residential house is available.
Is GST applicable to the resale of allotment rights?
If the original sale by the builder is in the GST era (post 2017) and the project is still under construction, transfer of allotment rights may attract GST. Consult your specific scenario with a GST advisor; typically buyers (transferees) absorb the GST.
What if the project is delayed indefinitely?
The Income Tax Act does not extend the construction completion deadline (3 years from your original property sale) merely because the new project is delayed. Plan timelines carefully when using Section 54 to buy an under-construction flat.
What if the builder cancels my allotment?
If the builder cancels and refunds your money, this is not a transfer for capital gains purposes. The cancellation charges (forfeited amount, if any) may be treated as a capital loss in some interpretations, but the law is unsettled.
Does Section 194-IA TDS apply on resale of allotment rights?
Yes, if the sale consideration is Rs. 50 lakhs or more, the buyer (transferee) must deduct 1% TDS under Section 194-IA. The deduction is on the gross sale consideration, not the gain.
Sources
- CBDT Circular 471 of 1986 — https://incometaxindia.gov.in
- CBDT Circular 672 of 1993 — https://incometaxindia.gov.in
- Income Tax Act, Section 2(14), 2(42A), 2(47) — https://incometaxindia.gov.in
- Section 54 exemption rules — https://incometaxindia.gov.in
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
