Query on LTCG when the property registration is cancelled

This query is : Resolved

Devesh Jagatram (Querist)
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27 January 2024 Dear Esteemed experts,

I had purchased an under-construction property (property A) from a builder in March 2022, for which construction stage-wise payments are still going. In FY 22-23, I had sold another property (property B) and used that money to pay for Property A.

I had claimed exemption of LTCG arising on sale of property B for FY22-23 as I had invested that amount towards partial payments for property A. A registered sale deed agreement was executed by the builder of property A and the property is still under construction.

Due to some circumstances, I am planning to cancel property A and shift my purchase to another under-construction unit in a different tower by same builder (say property C). To do this, the builder suggested that we need to cancel the existing sale agreement of property A, and they will be making a fresh booking for the new unit as property C. The builder will not make an internal transfer of already paid money and will be returning it back to me. Thereafter, on registration of property C sale deed, he will be raising fresh demand letters based on current construction stage of new property and I will need to pay him for it as a fresh booking.

In such a case, how will the LTCG claimed as investment in Property A be handled? There is no real income arising from cancellation of property A as the builder will only pay me the amount I paid to him so far less the TDS deducted by me.

Will this cancellation and transfer to new unit be treated as Sale/Transfer of Property A and fresh purchase of Property C?

I will be thankful for your insights on this scenario.
Thanks.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 July 2024 In the scenario you've described, where you purchased an under-construction property (Property A) and subsequently decide to cancel it to shift your investment to another under-construction unit (Property C) with the same builder, here are the key considerations regarding the LTCG (Long Term Capital Gains) exemption:

1. **Cancellation of Property A**:
- When you cancel Property A, it is considered as a withdrawal of your investment from that property. Since Property A was under construction and not yet completed, the cancellation would likely be treated as withdrawal of investment rather than a sale of property.
- The builder will refund you the amount you paid for Property A, less any deductions (like TDS) they are required to make.

2. **Tax Implications**:
- Since you claimed exemption on LTCG arising from the sale of Property B by investing in Property A, the cancellation of Property A will trigger a potential tax implication on the LTCG that was exempted earlier.
- According to Section 54 of the Income Tax Act, if the LTCG exemption conditions are not met (such as reinvesting in a new property within the specified time), the exempted LTCG becomes taxable in the year of cancellation or withdrawal.
- In your case, since Property A is under construction and no completion certificate has been obtained, the LTCG exemption was claimed on the basis of investment rather than on actual ownership transfer. The cancellation would thus be treated as withdrawal of investment.

3. **Transfer to Property C**:
- The investment in Property C will be treated as a fresh investment. When you invest the refunded amount from Property A into Property C, it will be considered as a new investment for the purpose of claiming LTCG exemption.
- Ensure that all payments for Property C are made in accordance with the builder's demands and within the specified timeframes to qualify for LTCG exemption under Section 54.

4. **Documentation and Compliance**:
- Document all transactions carefully, including the cancellation of Property A and the subsequent booking of Property C. Retain all receipts, agreements, and correspondence with the builder to substantiate the transactions.
- If applicable, report the cancellation of Property A and the investment in Property C correctly in your income tax return for the relevant assessment year.

5. **Consultation with a Tax Advisor**:
- Given the specific nature of LTCG exemptions and property transactions, it's advisable to consult with a qualified tax advisor or chartered accountant who can provide personalized advice based on your financial situation and the latest tax regulations.

By following these guidelines and ensuring compliance with tax laws, you can manage the transition from Property A to Property C while optimizing tax benefits to the extent possible under current regulations.