How project delays can hurt taxpayers

The cancelled projects in Noida highlight the risks in real estate,but even delayed projects can lead to losses for taxpayers.

When Rajeev Bansal sold a house four years ago,he made huge capital gains of over 40 lakh.However,the 38-year-old Pune-based manager in an MNC claimed tax exemption under Section 54F by booking an apartment in a newly launched project on the outskirts of Pune.Under this Section of the Income Tax Act,there is no tax liability if the entire proceeds from the sale of a house are used to buy another residential property.
The new property can be bought up to one year before or two years after the sale of the house.In case the house is being constructed,there is a three-year window.The taxman is lenient because real estate is not something you can purchase over the counter.It takes time to identify a suitable property,arrange the funds and get the paperwork done.
In Bansals case,the property was to be handed over to him in June 2009,a year-and-a-half after the sale.I thought it was a comfortable margin of close to six months, he says.He was wrong.Buffetted by the slowdown of 2008 and the severe cash crunch that followed,the builder was not able to complete the project on schedule.The possession was handed over only this year.
The delay has landed Bansal in a quandary.He got a notice from the Income Tax Department,demanding a tax of 8.25 lakh for the 41.25 lakh capital gains he had made on the sale of the house.The department contends that merely booking a flat has not made Bansal 100% owner of the property and,therefore,he cannot claim exemption under Section 54F.I have been slapped with a huge tax liability because the builder was not able to finish the construction on time, he says.
There have been several such cases in the past where delays have led to tax notices.However,in most cases,the taxpayer has been allowed the exemption.If substantial construction work has been done and the entire proceeds from the sale have been invested in the new property,the assessee is deemed to have complied with the provisions of Section 54F, says Minal Agarwal,partner in Delhi-based firm Mahesh K Agarwal and Co.She points out that the taxpayer cannot be denied the exemption merely because the builder failed to hand over possession within the stipulated period.
Bansal has appealed against the tax demand and hopes that the tribunal will rule in his favour.However,he could have avoided this mess by investing in a ready-to-move-in property.If you are looking for the Section 54F exemption,buy a property that is ready for possession.Dont buy in a project that has just been launched and could take more than the window of 36 months to complete, advises Sudhir Kaushik,co-founder and CFO of Taxspanner.com.
It is always best to buy property from a reputed builder.If you buy in a project that gets scrapped after a legal row,you can be in serious tax trouble.At least Bansal can argue his case that the capital gains have been reinvested in residential property.
The other option is to invest in the capital gains bonds issued by government agencies.You can invest a minimum of 10,000 and a maximum of 50 lakh in these bonds in a financial year to save the capital gains tax under Section 54EC.However,this has to be done within six months of selling the property.