Taxpayers have always been confused about how to calculate capital gains. Income Tax (IT) determines that income tax is determined based on the period of holding. However, it does not mention the date when the period of holding starts. Does it start from the allotment date or when the day when sale deed is signed. Or does it begin the date when a property is registered.
The starting date for the holding period is a source of litigation mainly because of different rulings that the high courts and the Income Tax tribunals have passed. The most accepted view is that the allotment date should be considered rather than the date of possession.
However, the allotment date can come into question dependent on terms and conditions mentioned in the allotment letter. It is the duty of seller to ensure that the terms and conditions of payment and sale should defend him in case of income tax issues.
Calculation of Income Tax
On transfer of property, the seller needs to pay capital gains tax. If the asset is held for more than 24 months, one would need to pay short term capital gains (STCG). If the seller sells the property after 24 months, then it would be considered as long term capital gains (LTCG) tax. This would reduce the tax outgo. In the Finance Act 2017, the holding period of immovable property had been reduced from 36 months to 24 months for it to be considered long term capital gain.
How to determine holding period
The Mumbai tribunal has recently decided that the date of issue of allotment letter by the developer should be considered in computing capital gain. If the investor sells the property 24 months after receiving allotment letter, then it would be considered as a long term capital gain. The seller would have to pay LTCG on it.
Hence, in case of a dispute between STCG and LTCG, be rest assured that the holding period has to be determined based on the date of allotment and not based on the date of signing of sale agreement or registration of sale deed. A few orders that might help you win such issues are mentioned below:
Law uses the word "held" instead of words such as "acquired", "purchased" or "owned" since the legal ownership is not an important factor in determining holding period.
An allotment letter implies that the buyer has the right to hold the property. Execution of sale deed is irrelevant at a subsequent date.
It is not necessary that the buyer has to be the owner of the proeprty with a registered sale deed to determine the holding period.