If a builder rebuilds your old parental house, are you taxed on the flats you receive?

It's very common for owners of old parental houses to get them rebuilt by builders. In such arrangements, the builder takes care of all the expenses. The owner receives a few flats in the new construction, while the remaining flats are sold by the builder. But what happens when it comes to taxation? Does the owner become liable to pay taxes in such cases? Are there ways in which they can end up paying nil tax? Today's Q&A answers these in response to a reader's query.

Taxation of the redevelopment of immovable property is a complex subject. The tax implications can differ based on the facts of each case. It will also depend on how the joint redevelopment agreement is worded.

In my opinion, you are transferring the rights in the land under the joint development agreement with the builder, against which you will get two floors constructed in the redeveloped building. So provisions of Section 54F of the Income-tax Act, 1961 will apply. The consideration for giving away part of your rights in the land is the construction cost of the two floors given to you by the builder, as you have not paid anything or received anything from the builder.

As per Section 45(5A) of the Income Tax Act, 1961, in case of Joint redevelopment agreements entered into by an individual or an HUF, the capital gains are deemed to arise in the year in which the completion certificate in respect of the project is issued by the competent authority.

In order to claim tax exemption on long-term capital gains from the transfer of your rights in the land, you are required to invest the whole of the sale consideration to acquire a residential house. As you are getting two floors for the same, you are deemed to have invested the full consideration for acquiring the two floors. The law requires that the exemption under Section 54F is available for investment made only in one residential house. So there may be some litigation from the Income-tax Department contending that you have invested in more than two houses. On the other side, you can contend that two floors constitute one residential unit if you can establish that the same will be used as a single residential unit for all the family members having a common kitchen.

Please note that you are required not to transfer the two floors acquired under the joint development agreement for a minimum of three years, failing which the long-term capital gains claimed earlier shall become taxable in the year in which you transfer the flats.