Capital Gains Exemption under Section 54

Claiming Capital Gains Exemption under Section 54 for Under-Construction Property: Understanding Acquisition Date and 1-Year Backward Benefit

When selling a flat and planning to claim capital gains exemption under Section 54 of the Income Tax Act, the timeline and dates for acquisition and sale are crucial, especially if your new residential property is under construction.

This article explains the important aspects of how the date of acquisition is determined for under-construction properties, the implications of payments in multiple installments, and how to use the 1-year backward benefit for exemption claims.

Date of Acquisition for Under-Construction Properties

For under-construction flats, the date of acquisition for capital gains purposes is generally the date of allotment, not the date of possession or registration. This means:

• The date when you receive the allotment letter and make initial substantial payment is considered the start of your ownership for exemption eligibility.
• Subsequent payments and possession dates do not affect the acquisition date, though they matter for calculating indexation benefits.
• This principle has been consistently upheld by judicial authorities including the Income Tax Appellate Tribunal (ITAT), high courts, and is supported by CBDT Circular No. 471 (1986).

Recent case law such as the ITAT Mumbai ruling of 24 March 2025, clearly affirms that the allotment date dictates the holding period and eligibility for exemptions under Section 54 or 54F.

Implications of Multiple Installments on Acquisition Date

Even if payments for the flat are made in several installments, the acquisition date remains the date of allotment. Important points are:

• Each installment payment can be indexed from its respective payment year for calculating cost inflation benefits.
• The schedule or timing of multiple payments does not create multiple acquisition dates or extend the exemption eligibility window.
• The exemption timeline under Section 54 always starts from the allotment date, the earliest date when substantial rights were acquired.

 The 1-Year Backward Benefit Under Section 54

The Income Tax Act permits a taxpayer to purchase a new residential property up to 1 year before the sale of an old residential property to claim exemption under Section 54. This means:

• If you acquire (are allotted) an under-construction flat within 1 year before selling your old property, you can claim exemption based on this new property purchase.
• The 1-year backward period is counted from the date of sale of the old property backward.
• For under-construction property, the date of allotment—i.e., when substantial rights are conferred—is treated as the date of purchase to meet this 1-year window.

Example:
If your DDA flat allotment date is 26/03/2024 and you are selling an old property, you must sell that old property on or before 25/03/2025 to claim exemption using this new flat purchase under the 1-year backward rule.

Legal Validation for Under-Construction Property Purchase Being Treated as “Purchase”

Although the statute specifies “purchase” within the 1-year before sale and “construction” within 3 years after sale, recent judicial interpretation clarifies:

• Booking or allotment of an under-construction flat with substantial rights acquired before the sale counts as a “purchase”.
• The 3-year construction rule applies only for construction started after the sale.
• Multiple ITAT rulings including Chennai ITAT in ACIT vs. Vandana Kapila (2021) and Kolkata ITAT in Rajeev Bansal vs. ITO (2019) support this view.
• Hence, allotment of an under-construction flat is treated as purchase enabling 1-year backward exemption eligibility.

Summary of Important Dates and Conditions

Conclusion

To claim capital gains exemption under Section 54 on the sale of a flat when the new property is under construction:

• Treat the date of allotment—when you receive the allotment letter and acquire substantial ownership rights—as the date of purchase.
• The 1-year backward benefit allows purchase of the new property within 1 year before the sale of your old flat; for under-construction property, this means the allotment date should fall within that window.
• Multiple installments paid later affect only indexation benefits, not the acquisition date.
• Recent authoritative case laws, CBDT circulars, and ITAT rulings reinforce this interpretation, ensuring taxpayers can plan their transactions accordingly for maximum tax benefit.

This clarity helps ensure you maximize your capital gains exemptions legally and avoid disputes during tax assessments. Always keep documentary proof of your allotment date and payment schedule to substantiate your claim in case of scrutiny.