Delayed House Possession May Impact Section 54F Capital Gains Tax Exemption

Long-Term Capital Gains Exemption at Risk for Under-Construction Flat Buyer

In a scenario that may have left many a taxpayer worried, a buyer of an under-construction flat in Chennai has raised concerns about the potential reversal of long-term capital gains (LTCG) exemption claimed under Section 54F of the Income-tax Act.

The buyer had booked the flat in April 2023 by paying a token amount and had sold a residential plot on September 20, 2023. The proceeds from the sale of the plot were used to make payments for the under-construction flat through bank transfers. The initial handover date for the flat was promised as the end of December 2025, which has now been revised to August 2026.

According to the Income-tax Act, Section 54F allows an individual or a Hindu Undivided Family (HUF) exemption from LTCG arising on the sale/transfer of any capital asset other than a residential house, if the net sale proceeds are invested in acquiring a residential house within the prescribed time period. The prescribed period for self-construction or booking an under-construction property is three years for completion of construction, not for utilisation of the sale consideration.

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In this case, since the plot was sold on September 20, 2023, the three-year period will end on September 19, 2026, which is beyond the promised delivery date of August 2026. Therefore, the exemption claimed by the buyer will not be reversed.

However, in some cases where the delivery of the residential property was made after the three-year period, certain Income Tax Tribunals have held that the exemption should not be reversed if the delay is due to reasons beyond the control of the taxpayer, and the taxpayer has already invested the required amount. If the delivery of the flat happens after September 19, 2026, the buyer may be able to take shelter under such tribunal decisions, although this may involve litigation.