It’s not written anywhere in the Income Tax Act in a single line that “Tax on sale of under-construction property before possession will be treated like this.” But the law gives us enough clues to piece it together.
Booked a flat that’s still under construction and now you want to sell before possession? The tax rule you need isn’t about how much you’ve paid so far. It’s about what you’re really selling: a right to acquire the property.
This guide gets into the exact provisions step by step—what the Act says, how to interpret it, when the 24-month rule applies, what counts as your cost, and how to calculate capital gains with a practical example. We’ll also cover when exemptions under section 54 or 54F can reduce or remove your tax.
By the end, you’ll have clarity on how to report such a sale and what tax impact to expect.
What exactly are you selling?
Before possession/registration: you are not selling a house. You are selling your right to acquire the property from the builder. This is a capital asset (Sec. 2(14)(a)) even if you have paid only part of the price.
What creates this right:
- Allotment letter or builder-buyer agreement
- Payment plan/receipts
- Your contractual entitlement to get the flat on completion
What actually transfers:
- Your rights in the allotment, and
- Your obligations to pay the balance (the buyer usually takes these over)
The builder typically endorses or novates the agreement in the buyer’s name. Even with partial payment, this is a transfer of a capital asset.
When it becomes “property”:
Only after possession and registration/transfer deed. From that point, you hold immovable property (land/building).
Why this matters for tax:
- Nature of asset: “right” before possession, “property” after possession
- Holding period: counted from allotment date in both cases
- Cost items: before possession, only what you actually paid plus transfer costs count for you
- Exemptions: different routes may apply (54F vs 54) depending on whether you sold a right or a house
The law in one minute (exact text + plain English)
A. What counts as a capital asset
Exact text (Sec. 2(14)(a): “property of any kind held by an assessee, whether or not connected with his business or profession;”)
Plain English: “Property” is a very broad word. It includes rights, not just physical things.
Exact text (Sec. 2(14) – Explanation 1, excerpt): “‘property’ includes … any rights … or any other rights whatsoever.”
Plain English: Rights are also “property.” Your allotment/right to acquire a flat is a capital asset.
B. What is a “transfer”
Exact text (Sec. 2(47)(i): “the sale, exchange or relinquishment of the asset;”)
Plain English: Selling or giving up your right = transfer.
Exact text (Sec. 2(47)(ii): “the extinguishment of any rights therein;”)
Plain English: Once you pass the right to someone else, your right ends. That’s a transfer.
Exact text (Sec. 2(47)(vi), excerpt): “any transaction … which has the effect of transferring, or enabling the enjoyment of, any immovable property.”
Plain English: Even if it’s via endorsement/arrangement with the builder, if the buyer steps into your shoes, it’s a transfer.
Exact text (Sec. 2(47) – Explanation 2, excerpt): “disposing of or parting with an asset or any interest therein … in any manner whatsoever…”
Plain English: Very wide net. Passing on your interest/right is a transfer.
C. When is it taxed
Exact text (Sec. 45(1), excerpt): “profits or gains arising from the transfer of a capital asset … shall be chargeable … and shall be deemed to be the income of the previous year in which the transfer took place.”
Plain English: Tax applies in the year you transfer the right/property.
D. Short-term vs long-term
Exact text (Sec. 2(42A), excerpt): “short-term capital asset” means a capital asset held … for not more than twenty-four months immediately preceding the date of its transfer.
Plain English:
- ≤ 24 months = Short-term
- > 24 months = Long-term
Exact text (Sec. 2(29AA): “‘long-term capital asset’ means a capital asset which is not a short-term capital asset;”)
Plain English: If it’s not short-term, it’s long-term.
E. Applying this to Calculate Tax on Sale of Under-Construction Property
- Before possession/registration: You transfer a right to acquire the flat. That right is a capital asset. Transfer triggers capital gains in the year of transfer. Use the 24-month test from the allotment/agreement date.
- After possession/registration: You transfer the property itself. Same 24-month test, counting from allotment.
Short-term vs Long-term: the 24-month test
How to count the period
- Start date: the allotment/agreement date with the builder.
- End date: the date you transfer the right (assignment/endorsement) or the sale deed date if sold after possession.
- Do not use the possession date to start the clock.
Rule of thumb (now)
- Held ≤ 24 months: Short-Term Capital Gain (STCG) → taxed at slab rates.
- Held > 24 months: Long-Term Capital Gain (LTCG) → taxed as per Section 112
Apply it to both situations
- Before possession (you transfer the right to acquire): use the same 24-month test from allotment.
- After possession/registration (you sell the property): still the same 24-month test, counted from allotment.
Quick grid
| Situation | What is transferred | Period counted from | ST/LT test | Typical tax |
|---|---|---|---|---|
| Sell before possession | Right to acquire the flat | Allotment/agreement date | 24 months | STCG: slab, LTCG: 20% with indexation or 12.5% without Indexation |
| Sell after possession | Immovable property | Allotment/agreement date | 24 months | STCG: slab, LTCG: 20% with indexation or 12.5% without Indexation |
Indexation tip
- For LTCG, index each payment tranche separately (booking, stage payments, stamp duty already paid). Apply the cost inflation index from the year of each payment to the year of transfer.
Worked examples (clean and realistic)
Example A – Sold before possession; held > 24 months → LTCG
- Allotment: 10 Sep 2022
- Assignment to Buyer B: 05 Oct 2025
- Money you actually paid to builder (principal only):
- Booking ₹2,00,000 (Sep 2022)
- Stage payment ₹8,00,000 (Mar 2023)
- Stage payment ₹5,00,000 (Jan 2024)
- Transfer expenses you paid:
- Builder’s transfer fee ₹40,000
- Brokerage ₹60,000
- Amount you receive from Buyer B (assignment price): ₹22,00,000
- Buyer’s balance payment to builder: Irrelevant for your sale value
Computation (your return):
- Full value of consideration = ₹22,00,000
- Less: Indexed cost of acquisition = index each tranche (₹2,00,000, ₹8,00,000, ₹5,00,000) from year of payment to year of transfer using CII
- Less: Expenditure on transfer = ₹40,000 + ₹60,000 = ₹1,00,000
- Long-term capital gain = ₹22,00,000 – Indexed cost – ₹1,00,000
Example B – Sold before possession; held ≤ 24 months → STCG
- Allotment: 20 Jan 2024
- Assignment: 15 May 2025
- Your payments (principal): Booking ₹3,00,000; Stage ₹6,00,000
- Transfer expenses: Builder transfer fee ₹30,000; Brokerage ₹40,000
- Amount received from buyer: ₹12,50,000
Computation:
- Full value of consideration = ₹12,50,000
- Less: Cost of acquisition = ₹9,00,000
- Less: Expenditure on transfer = ₹70,000
- Short-term capital gain = ₹2,80,000 → taxed at slab rate (no indexation)
Example C – After possession/registration; held > 24 months → LTCG on property
- Allotment: 01 Aug 2021
- Possession/registration: 30 Nov 2023
- Sale of flat (registered deed): 10 Dec 2025
- Sale consideration (as per deed): ₹80,00,000
- Costs you can claim: Total paid to builder (principal), stamp duty and registration, approved improvement costs, selling brokerage, legal, etc.
- Holding period: Count from allotment (01 Aug 2021) → > 24 months → LTCG with indexation.
- Stamp-value rules: Section 50C may apply on deeded sale of land/building.
Quick Cautions
- Interest on loan: If you never took possession, pre-construction interest is tricky. Conservative approach is not to add it to cost for capital gains.
- Business vs capital gains: If flipping rights is your regular trade, tax may shift to business income.
- Paper trail: Keep allotment/agreement, builder receipts, transfer fee invoice, brokerage bill, and bank proofs aligned.
Conclusion:
There is no single line in the Act that spells this out. Put the pieces together and it becomes simple: before possession you sell a right to acquire, after possession you sell the property. Section 2(14) makes the right a capital asset, Section 2(47) treats its transfer as a transfer, Section 45 charges the gain in the year of transfer, and Sections 2(42A) and 2(29AA) decide short or long using the 24-month test from the allotment date. Your sale value is what you receive. Your cost is what you paid plus transfer expenses. If it is long-term, apply indexation.
Key takeaways
- Before possession = transfer of right; after possession = transfer of property.
- Count holding from allotment, not possession.
- ≤ 24 months → STCG at slab; > 24 months → LTCG with indexation.
- Sale value = money received by you; buyer’s future payments to builder are not your sale value.
- Add builder transfer fee, brokerage, legal costs to transfer expenses. Keep documents tight.
For indexation (how to apply CII year-wise), LTCG/STCG rates, surcharge/cess, and when 54 / 54F / 54EC can save tax, see our detailed post: “Taxation on Sale of Immovable Property — Section 112 of Income Tax Act Simplified!”. It has the step-by-step indexation method, a quick CII guide, and a crisp checklist of exemptions with timelines.
Contact us
Got a buyer on the table and a deadline? Send us your allotment/agreement, payment ledger (with dates), builder receipts, loan statement (principal/interest split), and the draft assignment/endorsement terms. We’ll deliver a one-page tax computation (ST/LT), indexation working, an exemption options checklist, and filing notes-clear, no fluff, no surprises.