Tax Query: Reconstruction of ancestral residential property

My grandfather left an over 60-year-old ancestral residential property for his son, my father.

As the construction is now very old, and son’s families having expanded, my father wants to get the house re-constructed from scratch.

Since we cannot fund the entire construction by ourselves, my father has found a builder for this purpose.

From what the builder constructs, the builder will get 20 per cent share in the property (equal to one out of the three floors) and the rest of the house my father will retain. The registry to the builder for his share will happen only after he completes the full house and gets OC, etc, for the same so he is in a position to give possession to the owners.

As per the limited information that we have, under Sec 54 of IT Act, LTCG exemption is available only if you buy another house one year before or two years after sale (registry) or if you are constructing your house within three years after sale (registry).

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So, in this case, as the entire money from the sale is being used to build the house before the registry (two to two-and-a-half years before Registry) and also no physical movement of money is taking place

•     How is the LTCG for my father going to be calculated, and

•     How can my father get LTCG exemption?

Varun M

We understand that the part right in the property would be transferred to the builder after the certificate of completion is issued by the competent authority. In such a case, the first instance of capital gains would arise in the year in which the certificate of completion is issued. As per law amended by Finance Act 2017, with effect from April 1, 2018, the stamp duty value (as on the date of issue of the completion certificate by competent authorities) of the property that you receive from the builder after re-development, and any additional consideration paid by the builder, is treated as the sale proceeds of the ancestral property handed over for re-development.

Further, as per section 55(2)(b), for the purpose of section 49(1) of the Act, where the capital asset (being house property, in the instant case), becomes the property of the assessee by way of will and such asset became property of the previous owner  (i.e. your grandfather) before April 1, 2001, the cost of acquisition would be the cost to the previous owner or the Fair Market Value (‘FMV’) as on April 1, 2001 at the option of the assessee, subject to a maximum of stamp duty value (if applicable) of such property as on April 1, 2001. This value will be increased by cost of inflation index as provided by CBDT every year.

The law amended by Finance Act 2017 provides the clarity that in such agreements, the transfer would take place on the basis of certificate of completion as issued by competent authoritied for the whole or part of the project and new provision shall not apply where the assessee transfers his share before the issue of completion certificate.

Exemption under Section 54

The provision of Section 54 of the Act provides for exemption in respect of long term capital gain (held for a period exceeding 24 months) arising from the transfer of a residential house (original asset) by individual on the satisfaction of the conditions specified therein.

The conditions to be fulfilled for the operation of section 54 are:

•     The capital gains arising from the transfer of the original asset must be invested in a residential house property (new asset)

New asset should be acquired/purchased one year before, or two years after the date of transfer of original asset

•     Where new asset is constructed, it must be within 3 years after the date of date of transfer of original asset.

The above exemption provision would apply whenever your father wishes to transfer the property now acquired under the development agreement.

(The writer is a Partner with BDO India LLP)

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