Understanding time limits for long-term capital gains exemption on pre-booked residential properties

I booked an under-construction house in May 2024, for which only part payment is made, and the sale deed is also registered. I want to sell my two existing homes; one was purchased on Feb 22. We took possession of the second house on April 22, which was booked in February 2010, for which 90% payment was made in February 2014. When must I sell both properties for a long-term capital gains exemption? The date I have to consider for possession taken is April 22.

One can claim an exemption under Section 54 concerning long-term capital gains on the sale of a residential house if the capital gains are invested in buying a residential house within two years from the date of purchase of the original residential house. For under-construction property or self-construction, a more extended period of three years from the date of sale is allowed. Even if you have bought a house within one year before the sale of the house, you can still claim an exemption under section 54.

For capital gains on the sale of an under-construction property, there are differences of opinion as to whether it should be the date of possession or the date of booking which is to be taken as the purchase of property for this purpose. The property has become a long-term asset since you took possession in April 2022. Both existing properties have completed twenty-four months and have become long-term capital asset assets. Any capital gains made on the sale of these houses are eligible for exemption under Section 54.

You can sell both houses at any time, but you have to ensure that the construction of the under-construction house booked now is completed within three years from the date of sale of both houses. Please note that there is no restriction on booking the residential house before the sale of a residential house. What is required is that the construction of the new house should be completed within three years from the date of purchase of the asset. To the extent the money is not utilised for an under-construction property by the due date of filing of the ITR, the same has to be deposited in the capital gains account to be opened with specified banks and which can be utilised for payment to the developer.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on X.