COURTKAUTCHEHRY SPECIAL ON TAX SAVING RULES IN PURCHASE OF UNDER CONSTRUCTION FLAT
Bought an Under-Construction Flat? How Section 54 Helps You Save LTCG Tax
Tax law allows exemption if new house is purchased or constructed within specified timelines
Under-construction flats qualify if possession is taken within three years of selling old property
By Our Business Reporter
New Delhi: January 18, 2026:
Buying a home is one of the biggest financial decisions for most Indians. But what happens when you sell your old house and invest in a new one? The Income Tax Act, 1961, provides relief under Section 54, which exempts Long-Term Capital Gains (LTCG) tax if the sale proceeds are reinvested in another residential property. Recently, tax experts have clarified how this exemption applies to under-construction flats, a common choice for urban buyers.
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The rules are clear: if you sell a residential house and invest the gains in an under-construction property, you can claim exemption provided you take possession within three years of the sale. This provision ensures that taxpayers are not penalized for choosing under-construction projects, which often take time to complete.
What Section 54 Says
Section 54 of the Income Tax Act provides relief to individuals and Hindu Undivided Families (HUFs) who sell a residential house and reinvest the capital gains in another residential property.
Key rules include:
- Purchase timeline: The new house must be purchased within two years from the date of sale of the old house.
- Construction timeline: If the new property is under construction, it must be completed within three years from the date of sale.
- Exemption amount: The exemption is limited to the amount of capital gains or the cost of the new property, whichever is lower.
- Deposit scheme: If the money is not immediately used, it must be deposited in the Capital Gains Account Scheme (CGAS) before the due date of filing income tax returns.
Under-Construction Flats and LTCG Exemption
Many buyers prefer under-construction flats due to lower prices and flexible payment plans. Section 54 recognizes this and allows exemption if:
- The flat is booked within the stipulated time.
- Possession is taken within three years of selling the old property.
- Payments made in instalments are considered valid investments, provided possession is within the three-year window.
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For example, if you sold your house in January 2023 and booked an under-construction flat in March 2023, you must receive possession by January 2026 to claim exemption.
Common Mistakes Taxpayers Make
- Confusing timelines: Many taxpayers assume booking alone qualifies, but possession within three years is mandatory.
- Using indexed gains: Exemption applies only to the actual LTCG amount, not indexed gains.
- Missing deposit deadlines: Failure to deposit unutilized gains in CGAS before filing returns can disqualify exemption.
- Multiple properties: Exemption is allowed for only one residential property purchased or constructed.
Judicial Interpretations
Courts have consistently upheld the principle that Section 54 relief should be available for under-construction flats if possession is obtained within three years.
- In several rulings, tribunals have clarified that delays caused by builders may not always disqualify exemption if the taxpayer has made genuine efforts.
- However, if possession is not taken within the statutory period, exemption may be denied.
Why Section 54 Matters
- Encourages reinvestment: The law ensures that taxpayers reinvest in housing rather than pay heavy taxes.
- Supports housing sector: By allowing exemptions for under-construction flats, the law supports real estate growth.
- Protects middle-class buyers: Most urban buyers rely on instalment-based under-construction projects, making this exemption crucial.
Expert Advice for Taxpayers
- Always maintain proper documentation of payments, booking receipts, and possession letters.
- Ensure possession is taken within three years to avoid disputes.
- Use the Capital Gains Account Scheme if funds are not immediately invested.
- Consult a tax advisor before filing returns to avoid errors.
Conclusion
Section 54 of the Income Tax Act provides a valuable tax-saving opportunity for homeowners reinvesting in new properties. For under-construction flats, the key condition is possession within three years of selling the old house. With proper planning and documentation, taxpayers can avoid LTCG tax and secure their financial future.
The recent clarifications and judicial support make it clear: under-construction flats are eligible for exemption, provided timelines are respected. For India’s growing urban middle class, this is a welcome relief that balances tax compliance with housing aspirations.
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