Under-Construction Flat & Tax: Are You Covered?

If you bought an under-construction flat and sold another property to save capital gains tax, the Income Tax Act has strict rules about what counts as 'construction'. Getting this wrong means losing your tax exemption entirely.

Here's what happened: Section 54 of the Income Tax Act allows capital gains exemption if you reinvest sale proceeds into construction of a new residential property within 3 years.. Tax authorities and courts are debating whether simply receiving an allotment letter for an under-construction flat qualifies as 'construction' for Section 54 exemption.. CBDT has issued circulars and courts have given varying rulings — making this a grey area that could trigger tax demands on lakhs of rupees of capital gains..

What you should do: Confirm with a tax consultant whether your under-construction flat purchase qualifies as 'construction' or 'purchase' under Section 54 — the exemption windows differ (3 years vs 2 years).. Deposit any unused capital gains in a Capital Gains Account Scheme (CGAS) at a scheduled bank before filing your ITR to protect your exemption deadline.. Keep all builder payment receipts, allotment letters, and agreement copies — these documents are essential if the Income Tax Department questions your exemption claim..

If your builder is delayed beyond 3 years, you may still claim exemption if you can prove the delay was not your fault — courts have ruled in favour of buyers in genuine cases.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.