• This FAQ covers income-tax issues on Redevelopment. We have tried to make a complex issue as simple and inclusive as possible. Hope this Sewa helps. The Goverment can help with clarity as stated at end of the article. 

This piece has very significant inputs from Senior Chartered Accountant Mr Deepak Tikekar and is compiled by me.

Redevelopment (RD) is gaining traction in Mumbai. Given the complexity of RD and the maze of BMC regulations, many Societies overlook the income-tax related aspects. An earlier article had a macro view on RD

This FAQ seeks to cover income-tax issues w.r.t. RD.  It tries to give a reader answers to usual questions. Based on an individual situation, the issues may be more complex. Either way we recommend that the Society or and its Members consult a Tax Expert. This is only an introduction to some of the issues.  

Whilst I qualified as a Chartered Accountant decades ago, I never specialised in income-tax and practiced as a C.A. A Fellow CA shared an excellent presentation made by Mr Deepak Tikekar of Tikekar and Associates LLP, Mumbai on Tax issues Redevelopment and Section 45 (5A) of the Income-Tax Act, 1961 (ITA61).

I reached out to Mr Tikekar for help. He kindly consented to edit the FAQ, the draft of which was compiled by me based on a reading of his presentation and understanding of law. This draft was then reviewed by CA Tikekar and changes made. eSamskriti is grateful to Mr Deepak Tikekar for his time and support.

This FAQ is based on the existing version of the ITA61 and not on draft proposed in Income Tax Bill 2025. 

In RD there could be various scenarios on area. A member holding say a 1000 square feet flat may get a 1000 square feet or say 1400 square feet in the redeveloped building. Some may sell the old flat or the redeveloped flat.

The format is question and answer. Sometimes said, simply put to explain.

1. What is Capital Gain & Long-Term Capital Gain? Section 2 (29B)?

Capital Gain is gain arising out of transfer of capital asset & is taxable in the previous year in which transfer takes place.

‘Long-term capital gain’ means capital gain arising from the transfer of a long-term capital asset.

2. What is Capital Asset?

Section 2 (14) Capital Asset – “property of any kind held by an assessee, whether or not connected with his business or profession.”  Flat owned in a co-operative society would be a capital asset. Flat occupied as protected tenant also would be capital asset.

3. What is a Long Term Capital Asset (LTCA) Section 2 (29AA)

LTCA is that which is not a short term asset. So what is a short-term asset?

Section 2 (42A) – “short-term capital asset" means a capital asset held by an assessee for not more than (twenty-four) months immediately preceding the date of its transfer.” 

Simply put, it means that a LTCA is one which an individual is holding for more than 24 months from the date of its acquisition.

4.   To constitute any flat as LTCA, what shall be considered as the date of acquisition of flat?

Where the individual has purchased as a under construction flat from Developer or from existing Society, the date of acquisition would be date of allotment letter by the Developer/Society and not the date of registration of Agreement to Sale as held by Bombay High Court in Principal Commissioner of Income Tax “PCIT” vs. Vembu Vaidyanathan in 413 ITR 248 based on Circular No. 672 dated 16.12.1993 of Central Board of Direct Taxes “CBDT”.

Where the individual has purchased existing flat from another individual, the date of acquisition would be the date of execution of Agreement to Sale. 

5. When is capital gain taxable? Whether when individual enters into Permanent Alternate Accommodation Agreement “PAAA” with Developer/Society for redevelopment of his existing flat?

As per section 45 capital gain is taxable when transfer is complete and not when money is received. As per section 2(47) transfer is complete when individual enters into registered Agreement to Sale and also hands over possession of his existing flat. Earlier capital gain was taxable when individual signed registered PAAA and handed over possession of his existing flat.

On many occasions the Developer even after executing PAAA and obtaining possession from individual flat owner, neither commenced the construction nor completed the project. Thus, individual flat owners were fastened with tax liability even when no real income accrued to them.

Hence, the Government introduced section 45(5A) with effect from 01.04.2018 and taxability of capital gain was changed as explained below.

6. Capital Gain Section 45 (5A)

“Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by ⁴¹[any consideration received in cash or by a cheque or draft or by any other mode] shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.” 1

Explanation—For the purposes of this sub-section, the expression—(i)"competent authority" means the authority empowered to approve the building plan by or under any law for the time being in force;(ii)"specified agreement" means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;(iii)"stamp duty value" means the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.

Simply put, with effect from 01.04.2018, when the individual flat owner is given new flat on same plot of land on which his existing flat was situated, capital gain becomes taxable in the year in which the certificate of completion is given by the competent authority, which in the case of Mumbai is Municipal Corporation of Greater Mumbai “MCGM”. 

If the individual is given new flat on different plot of land, then section 45(5A) will not apply and capital gain would be taxable as mentioned in FAQ-5 above.

Similarly if the individual is a protected tenant of flat and he is given new flat then section 45(5A) will not apply and capital gain would be taxable in the year in which possession of his tenanted flat is given to developer since his tenancy right gets extinguished on giving possession of his existing tenanted flat.

7. Normally individual flat owner receives following consideration for redevelopment of his existing flat:

a) Non-monetary consideration in the form of new flat which is equal to or more than area of existing flat along with car parking garage.

b) Monetary consideration in the form of (i) “Corpus” or Hardship Compensation” for inconvenience suffered by individual flat owner during construction period. (ii) Rent for flat temporarily taken on rent during construction period (iii) Brokerage in respect of flat taken on rent during construction period. (iv) Shifting charges or Transport Charges for shifting from existing flat to flat taken on rent during construction period. 

What is the taxability of non-monetary consideration and monetary consideration received by individual flat owner?

a) As per section 45(5A) stamp duty value of flat & garage as on date of receipt of certificate of completion will form part of total consideration and correspondingly taxable. Also see FAQ8 below.  

b) (i) Corpus or Hardship Compensation : Bombay High Court in Sarfaraz S Furniturewala vs. Afshan Sharfali Ashok Kumar Bombay HC WP-4958 of 2024 and Income Tax Appellate Tribunal, Mumbai  in Jitendra Kumar Soneja vs. ITO (2016) 48 CCH 153, Kushal K Bangia vs. ITO (2012) 32 CCH 195, Rajnikant D Shroff vs. ITO - ITA 4424/Mum/2014 dated 23.09.2016, Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 (Mum) have held amount received on this account is Corpus Receipt not liable to tax. However it should be noted that amount thus received should be reduced from cost of new flat as per (a) above for computing capital gain arising on subsequent sale of new flat.

c) (ii) Rent during construction period, (iii) Brokerage & (iv) Shifting Charges : There are three possible tax treatments as under:

1. Capital Receipt not liable to tax as held by Income Tax Appellate Tribunal, Mumbai in Smt. Delilah Raj Mansukhani vs. ITO ITA 3526/Mum/2017 dtd. 29.01.2021, Shri Devshi Lakhamshi Dedhia vs. ACIT ITA 5350/Mum/2012. However it should be noted that amount thus received should be reduced from cost of new flat as per (a) above for computing capital gain arising on subsequent sale of new flat.

2. As part of total consideration, taxable under the head Capital Gain. Expenditure actually spent in this regard can be claimed as expenditure in connection with transfer for e.g. If rent received from Developer is say Rs. 2,00,000/- whereas rent actually paid is say Rs. 1,50,000/- then Rs. 50,000/- would be taxable under the head Capital Gain.

3. Taxable under the head “Income from Other Sources” as held by Income Tax Appellate Tribunal, Mumbai in Jatinder Kumar Madan vs. ITO (2012) 32 CCH 59 MumTrib after allowing expenses actually incurred in this regard. Since this is taxable under the head Income from Other Sources” it will be taxable in the year of receipt of relevant income. If rent received from Developer is say Rs. 2,00,000/- whereas rent actually paid is say Rs. 1,50,000/- then Rs. 50,000/- would be taxable under the head Income from Other Sources.

Tax deducted at Source in respect of monetary payments should be claimed in the year in which relevant income is offered to tax.

8. In respect of value of new flat & garage allotted under redevelopment, can individual claim exemption under section 54 of ITA61?

If the existing flat was residential flat held for more than 24 months before its transfer and new flat acquired under PAAA is also residential flat then individual can claim exemption in respect of value of new flat on compliance with conditions of section 54 of ITA61.

Garage or Car Parking is part of cost of house eligible for exemption u/s 54 as held by Income Tax Appellate Tribunal, Mumbai in ACIT vs. Usha B Madan ITA 4258/Mum/2011.

If existing flat is commercial flat and new flat allotted is residential flat, then individual can claim exemption under section 54F of the ITA61.

If existing flat is residential flat and new flat allotted is commercial flat, then no exemption is available.

9.   So will exchanging your small flat for a bigger flat in a redeveloped building will be eligible for exemption under section 54 of ITA61.

Yes as explained above and size of flat does not matter.

10. Can individual acquire two new flats in lieu of existing flat and claim exemption under section 54 of ITA61?

Yes. The individual can claim such exemption once in life time by making a claim provided long term capital gain computed before claiming such exemption is less than Rs. 2 crore.  

If the long term capital gain exceeds Rs. 2 crore then individual has option to claim exemption u/s 54 in respect of any one house of his choice. ITO vs. Sushila M Jhaveri (2007) 109 TTJ 299 (SB).

11. Can individual acquire one new flat under PAAA in lieu of two existing flats? and claim exemption under section 54 of ITA61?

Yes as held in Vijay Kumar Wanchoo vs. ITO (2020) 59 CCH 186 (Del).

12. Is there any monetary limit up to which exemption under section 54 of ITA61 can be claimed?

Yes. The exemption under section 54 cannot exceed Rs. 10 crore with effect from 01.04.2024.

13. What is the tax rate applicable to long term capital gain on transfer of residential house?

Long Term Capital Gain on transfer of residential house is taxable at 12.5% plus applicable surcharge and education cess in respect of transfers effected after 23.07.2024.

14. If the individual choses to sell a Redeveloped Flat within 2 years of receipt of the completion certificate would such a sale attract Capital Gains Tax?

If the redeveloped property is sold within 2 years from the date of possession, the resultant gains would be taxable as Short-Term Capital Gain Tax after withdrawal of exemption claimed under section 54 of ITA61 and would be taxed at normal slab rates.

15. In respect of redevelopment of tenanted flat, can individual claim exemption under section 54 of ITA61?

No. Individual can claim exemption under section 54F of ITA61 provided he complies with conditions as stipulated by relevant section.

16. After claiming exemption under section 54 of ITA61, can individual claim exemption under any other section?

Yes. Individual can claim exemption under section 54EC of ITA61 by making investment in specified bonds within 6 months of date of transfer of existing residential flat. There is no bar to claim exemption under both sections as held by Income Tax Appellate Tribunal, Mumbai in ACIT vs. Deepak S. Bheda ITA 5011/Mum/2010. 

17. Since section 54 of ITA61 referred to often, what is provision?

Capital Gain on sale of residential house invested in residential house Section 54 “If a assesse has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section.

For sake of brevity full section not given here.

18. Considering the interplay between Section 45(A) read with Section 54 would the assesse still be required to have the flat constructed and take possession in 3 years?

After insertion of section 45(5A), section 2(47) defining “transfer” has not been amended to provide that transfer is complete when certificate of completion is issued by municipal authority. Thus if it is construed that transfer is complete under section 2(47) read with section 45, on executing PAAA and handing over possession of existing flat to developer, then for claiming exemption under section 54 the construction of new flat should be completed within three years of transfer of existing flat. Then individual can place reliance on decision of Karnataka High Court reported in PCIT vs. C Gopalaswamy (2016) 384 ITR 307 (Kar) where it was held that even if the agreement for purchase of flat provides that possession of new flat will be given after three years, claim for exemption under section 54 cannot be denied.

However if it is held that transfer and chargeability is complete in the year of receipt of completion certificate then since possession of new flat is received within stipulated period, the individual can claim exemption under section 54 of ITA61.

Let us consider situation where after claiming exemption under section 54 there remains some long term capital gain taxable and the individual intends to claim exemption under section 54EC. In such scenario whether period of six months as per section 54EC should be reckoned from the date of handing over possession of existing flat or from date of receipt of completion certificate is a moot question.

Further in the year of taxability of capital gain on the date of receipt of completion certificate whether investment  made in 54EC bonds say two/three years prior i.e. within six months of handing over possession of existing flat to Developer will qualify for exemption is also a highly debatable issue.  

The Government should come out with suitable clarification in this regard. 

eSamskriti is grateful to CA Mr Deepak Tikekar for his effort and time.

References

1. Income-Tax Act 1961

2. Mr D Tikekar’s presentation 

Disclaimer – This paper is an introduction to make society members aware of possible income-tax issues on redevelopment. Neither Mr Deepak Tikekar nor esamskriti is responsible or liable for any decisions that you take after reading this. Readers are requested to consult a Chartered Accountant or Tax Advisor or Lawyer with their specific case. This paper is only a form of SEWA. 

This piece should not be republished without written approval of www.esamskriti.com 

Also read

1. Tax Implications – Redevelopment of Society

2. Taxability of Fund received from the builder

3. Redeveloped Flat not taxable as Income from Other Sources