Capital Gains on Selling an Under-Construction Flat: When the 24-Month Clock Starts

When you sell a flat that is still being built, the 24-month clock for a long-term gain usually starts on the date of your allotment letter, not on possession or registration. High courts and CBDT circulars treat allotment as the moment you acquire the right. Sell after 24 months from allotment and the gain is long-term; sell earlier and it's taxed at your slab rate.

Key takeaways

• Before possession, what you sell is your right in the flat, a capital asset. The gain is computed like any other capital gain under the Income-tax Act, 2025.
• Holding runs from the allotment letter, following Madhu Kaul and Vinod Kumar Jain in the Punjab and Haryana High Court and CBDT Circular 471.
• Your cost is every instalment you actually paid. Whether indexation runs from each payment's year or the allotment year is disputed.
• Buying an under-construction flat is treated as construction for the reinvestment exemption, so you get three years.
• Whether selling a booking right qualifies for the house-to-house exemption under section 82 is unsettled. Plan around section 86 if you can.

What you're actually selling

Until the conveyance deed is registered, you don't own a flat. You own a contractual right under your allotment letter and builder-buyer agreement to get one. When you pass that right to another buyer before possession, the tax law treats it as a transfer of a capital asset, since "transfer" includes relinquishing any right in an asset. Section 67 of the new Act (old section 45) charges the gain, and section 72 (old 48) computes it.

If you are selling after possession but soon after, the same question arises: does your holding run from allotment or from the day you got the keys? The answer below covers both.

When the 24-month clock starts

Land or a building is long-term if held for more than 24 months, under section 2(101) (old 2(42A)). For an under-construction flat, the weight of authority is that you "hold" it from allotment.

• CBDT Circular 471 (1986) said a DDA allotment under its self-financing scheme is the date of acquisition. Circular 672 (1993) extended the same treatment to allotments by co-operative societies and other bodies on similar terms.
• Vinod Kumar Jain, Punjab and Haryana High Court: for DDA flats, holding counts from the allotment letter.
• Madhu Kaul v. CIT, Punjab and Haryana High Court: the right to hold the flat crystallised on allotment. Paying later instalments, identifying the unit and getting possession were consequences of that right.
• Anita D. Kanjani and other Mumbai tribunal rulings have applied the same idea to private builders, counting from the allotment or agreement date rather than possession.

Two cautions. First, a tax officer may still argue for the agreement or possession date, especially where the allotment letter is vague about the unit or the price. A clear allotment letter naming the flat, the price and the payment plan is your best evidence. Second, an expression of interest or a refundable token without an allotment is weak ground for starting the clock.

Your cost, and the indexation dispute

Cost is what you actually paid the builder: the booking amount and every instalment up to the sale, plus stamp duty if an agreement was registered. Money due but unpaid doesn't count. Keep the builder's receipts and bank statements, because this is the number the officer checks.

For indexation, two views compete. The department's usual method is to index each instalment from the financial year it was paid. In Lata G. Rohra v. DCIT, the Mumbai tribunal allowed indexation of the whole cost from the allotment year, since that's when the asset was acquired. Some tribunals have since followed that; a middle view indexes payments before allotment from the allotment year and later payments from their own years. Expect the per-instalment method unless you're ready to argue it.

12.5% or 20%?

Long-term gains are taxed at 12.5% without indexation under section 197 (old 112). A resident individual or HUF selling "land or building or both" acquired before 23 July 2024 can instead pay 20% with indexation if that's lower. Whether a booking right counts as land or building for that option isn't settled. If the indexed route saves real money, get a CA's view before relying on it.

A worked example

You were allotted a flat in August 2021 and paid Rs 10 lakh in 2021-22, Rs 20 lakh in 2022-23 and Rs 20 lakh in 2023-24. In October 2026 you assign your right to a new buyer for Rs 75 lakh. The CII is 317, 331 and 348 for those three years, and 384 for 2026-27. Tax includes 4% cess and ignores surcharge.

Three lessons. Holding past 24 months from allotment cut the bill by more than half. Over a short holding, indexation from each payment's year can cost more than the flat 12.5%, so compute both. And the base-year dispute is worth about Rs 25,000 here, more on bigger flats.

Reinvestment exemptions

When you sell the booking right

Section 82 (old 54) exempts the gain on a "residential house". Whether a right in a flat not yet built counts as one is contested, and the safer reading is that it may not. Section 86 (old 54F) covers the sale of any long-term asset other than a house, but it asks you to invest the whole net sale price, not just the gain, and gives a proportionate exemption if you invest less. In the example, that means putting Rs 75 lakh, not Rs 25 lakh, into the next home for full relief. The section 85 bonds (old 54EC) are open only for gains on land or buildings, so the same doubt applies there.

When you buy an under-construction flat with the proceeds

This part is settled in your favour. Circulars 471 and 672 treat booking a flat with a builder as construction, so you get three years from the sale of your old property, not two. Courts have gone further:

• The Madras High Court in Sardarmal Kothari held that the exemption doesn't require construction to be complete within the period.
• The Karnataka High Court in Sambandam Udaykumar said the same for section 54F: investing within time is enough.
• The Mumbai tribunal in Kishore H. Galaiya allowed section 54 even though possession came after three years.

Not every ruling agrees. Some Mumbai benches, following the Bombay High Court in Beena K. Jain, looked at the possession date. The safest position is to have paid the money within three years and to keep proof that any delay was the builder's. If the gain isn't all paid out before your return is due, park the rest in a Capital Gains Account Scheme deposit.

Risks and cases where the rules bite

• Flipping in under two years. The gain is added to your income at slab rates, up to 31.2% with cess in the top slab before surcharge.
• A stalled project. If the builder never delivers, your exemption on the old sale is exposed, whatever the case law says about delays. Check the project's RERA record before committing capital-gain money, and read our comparison of under-construction vs ready-to-move homes.
• Cash premiums. Any part of the price received off the record isn't in your computation, and any part paid on your purchase isn't in your cost. Both create problems later.
• Weak paperwork. An unsigned or undated allotment letter, or an agreement that doesn't identify the unit, hands the officer the argument for a later start date. Check the builder-buyer agreement clauses before you sign.

The general rates and exemptions for completed flats are in our capital gains tax guide.

Frequently asked questions

Does the holding period start from the booking date or the allotment date?

Courts count from the allotment letter, which gives you a defined right to a specific flat. A booking form or expression of interest before allotment usually isn't enough, because nothing identifiable has been allotted yet. If your builder issued the allotment letter weeks after the booking, the later date is the safer one to use, and the one an officer will accept without argument.

I got possession last year but was allotted the flat four years ago. Is my gain long-term?

Yes, on the weight of case law. Tribunals and the Punjab and Haryana High Court have held that possession and registration are consequences of the right you acquired at allotment, so your holding runs from the allotment date. Keep the allotment letter and the payment record. Some officers still argue for the possession date, so be ready to cite the rulings.

Can I claim section 82 if I sell my old house and book a flat under construction?

Yes. Booking a flat with a builder is treated as construction, so you have three years from the sale of the old house. Pay the gain towards the new flat within that time, and use a Capital Gains Account Scheme deposit for any amount not paid by your return's due date. Several courts have allowed the exemption even where the builder handed over late.

Are instalments paid by a home loan part of my cost?

Yes. What counts is money paid to the builder for the flat, whether it came from savings or a loan disbursement. The loan itself doesn't change the computation. Interest you paid on the loan is a separate matter: if you already claimed it as a deduction against income, you can't add it to the cost of the flat as well.

If you're deciding whether to exit an under-construction flat now or wait past the 24-month mark, the Realty Hunting team can walk through the numbers with you.