Section 54 of Income Tax Act

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subhash k. sinduria (Querist)
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02 April 2009 Dear All,

I have a query which i am putting here as below:-

I have a house property as self occupied acquired 5 years ago.

I have entered into a purchase agreement with a builder regarding purchase of a flat in a under construction building.I will get the possession after 6 months from now.

I have a plan to sell my existing self occupied property and i want to avoid LTCG on the same.

As per section 54 of Income Tax Act, I can purchase a house property "one year before the date of transfer" to avail exemption of LTCG.

In my present situation as discussed above, my questions are as below:-

a) Will i get exemption under section 54 of Income Tax Act for my booking of A FLAT in a under construction building. Will it be a "purchase" and not construction so as to qualify for "one year before the date of transfer" cretaria ?

b) What will be the "date of purchase" ? Will it be the date of buy agreement or the date of getting possession ? This is relevant because accordingly i will plan the date of sell to qualify for exemption under section 54 of income Tax Act.

If answeres are based on any Rulings/circular, please indicate some reference so that i can retrieve the same.

Thanks

Subhash Sinduria

subhash k. sinduria

subhash k. sinduria (Querist)
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15 April 2009 Dear all,

Please respond to my query.

Thanks,
Subhash

subhash k. sinduria

subhash k. sinduria (Querist)
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28 April 2009 Dear all,

Is there anybody to solve this query ?

Subhash

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 Your questions relate to the interpretation of "purchase" vs. "construction" under Section 54 of the Income Tax Act, which is crucial to determine eligibility for capital gains exemption when dealing with under-construction properties.

🔍 Let’s address your questions one by one:
Q1: Will I get exemption under section 54 for booking a flat in an under-construction building (i.e., does it qualify as a "purchase") within 1 year before sale of original property?
✅ Answer: It depends—but most likely, NO.
Generally, booking a flat in an under-construction project is treated as construction and not as purchase, for the purposes of Section 54.

This means:

You do not get benefit of the 1-year backward window that is available for "purchase."

Instead, the timeline for construction is 3 years after the date of transfer of the original asset.

🧾 Judicial Support:
[CIT v. J.R. Subramanya Bhat (1987) 165 ITR 571 (Karnataka HC)] – held that the date of possession of property is relevant, not the date of agreement.

[Balraj v. CIT (2002) 254 ITR 22 (Delhi HC)] – held that investment in a flat under construction is to be treated as "construction" for Sec. 54, even if allotment was before sale.

📌 Conclusion: If your new flat is under construction, you must sell the existing house first, and then invest the capital gain in the flat's construction within 3 years to get the exemption. Booking before sale will not satisfy the “purchase within 1 year” clause.

Q2: What is the “date of purchase”? Date of agreement or possession?
✅ **Answer: The "date of purchase" is generally considered to be the date of possession/registration, especially in under-construction cases.
Merely entering into an agreement or paying advance does not always amount to a completed purchase.

For ready property, date of agreement + possession may be considered "purchase."

For under-construction flats, courts have treated such investment as construction, and thus the completion/possession date becomes important.

🔁 Practical Implication for You:
If your goal is to claim exemption under Section 54 for selling your self-occupied property, and you've booked a flat under construction, then:

You should plan the sale of your current property first, and treat the new flat as an investment in construction.

Then, ensure the entire capital gain is invested in that construction within 3 years from the date of sale.

If you already booked before the sale, you cannot claim exemption under “purchase within 1 year before” clause.

✅ Summary:
Point Answer
Under-construction flat = Purchase? ❌ No — it is treated as construction for Sec 54
Date of purchase for under-construction flat? ✅ Usually the date of possession/registration
Eligible for exemption if booked before sale? ❌ Not under "purchase within 1 year before"
Best course? Sell first, then invest in flat (construction) within 3 years

📚 References / Citations:
CIT v. J.R. Subramanya Bhat [(1987) 165 ITR 571 (Kar HC)]

Balraj v. CIT [(2002) 254 ITR 22 (Del HC)]

CIT v. Sambandam Udaykumar [(2012) 345 ITR 389 (Kar)]

Circular No. 667, dated 18.10.1993 – re: timing of investment in housing project

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