Delays in Possession of Under-Construction Flats May Impact Section 54F Exemptions

Tax Relief Under Section 54F: Eligibility Criteria and Deadline for Flat Possession

A taxpayer who claimed long-term capital gains (LTCG) exemption under Section 54F after selling a residential plot is seeking clarification on whether a delay in possession of an under-construction flat could lead to reversal of the tax benefit.

The taxpayer had booked an under-construction flat in Chennai during April 2023 by paying a small token, and sold a residential plot on September 20, 2023. The taxpayer had claimed exemption under Section 54F while filing the ITR for assessment year 2024-2025, with the flat handover date initially promised as the end of December 2025, which has now been revised to August 2026.

Understanding Section 54F of the Income Tax Act

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Section 54F of the Income Tax Act allows an individual and a Hindu Undivided Family (HUF) exemption for long-term capital gains arising on the sale/transfer of any capital asset (including plots) other than a residential house, if the amount of net sale proceeds is invested for acquiring a residential house within the prescribed time period.

Key Eligibility Criteria for Tax Relief

To be eligible for tax relief under Section 54F, the taxpayer must acquire a ready-to-move-in house within two years from the date of sale of the asset. Alternatively, a residential house bought within one year also qualifies for this exemption. For self-construction or booking an under-construction property, the period prescribed is three years for completion of construction, not for utilization of the sale consideration.

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Deadline for Flat Possession and Reversal of Tax Benefit

Since the plot was sold on September 20, 2023, the period of three years gets over on September 19, 2026, which is beyond the promised date of delivery (August 2026). However, the taxpayer may still be eligible for tax relief under tribunal decisions, which have held that even in cases where delivery of the residential house property is given after the period of three years, the exemption should not be reversed if the delay happens due to reasons beyond the control of the taxpayer and the taxpayer has already invested the required amount.

Expert Advice

To avoid potential litigation, it is in the taxpayer's interest to ensure that possession of the flat is obtained before the deadline of September 19, 2026.