Understanding Holding Period For An Under-Construction Property

Bought a property for investment purpose? You will have to make many calculations and will be liable to pay tax, especially during transactions. So when selling such property, holding period becomes critical in deciding the taxation benefit on the long-term capital gain. Here is what you all need to know about the term: 

What is holding period?

For the duration you held the property to yourself is called the holding period. It is defining factor that the gains you make are short-term or long-term for tax purpose. While the long-term holding period for the property was three years earlier, this was recently reduced to two years, as announced by Union Finance Minister Arun Jaitley in his Budget speech on February 1, 2017.

How is holding period important?

If you are an investor looking at long-term capital gains associated with tax benefits, you will have to hold the property for atleast two years. And, once you sell the property, you get the benefits of indexation, concession rate of 20 per cent and tax saving instrument by investing in another property or capital gains bond.

How is holding period calculated?

Though there are certain ambiguities related to the calculation of holding period for an under-construction property, there have been several court judgements in different cases. The biggest question that pops up while calculating holding period — whether it has to be calculated from the date on which the property was booked or its possession date. Previous judicial pronouncements are often factored in for better clarity and there are conflicting views related to the same.

In one of the decisions, the high court ruled out that the flats allotted by Delhi Development Authority, the holding period will be counted from the date of allotment letter. Later, Central Board of Direct Taxes issued a notification stating that under self-financing schemes of DDA, the holding period will begin from the date of the allotment letter. Whereas in another court case, Bombay High Court gave a ruling that a flat allotted in lieu of tenancy rights, the holding period will be calculated from the date of possession.

However, in the recent ruling, the Bombay court ordered that under-construction flat, booked with a developer, letter of allotment or sale agreement is a document that gives buyer the right to acquire the property and if the buyer sells the property after 24 months of acquiring this right than the holding period will be calculated from date of allotment and will be considered as a long-term capital asset. But, if the buyer takes the possession, the holding period would once again commence from the date of possession.

Tips for property owners

• If you want to sell your under-construction property, sell it before taking the possession, and only if the period is more than two years.

• The terms and conditions laid by the developer might be different from Delhi Development Authority. Therefore, the owner should remain careful about the facts.

• To save long term capital gains tax, invest in another residential property.