My society is under redevelopment . I have surrendered an excess area of 78 sq ft to the developer since suitable flat equivalent to my entitled area was not available . Do I have to pay capital gains tax on the amount received in exchange of the excess area surrendered ? At what rate ? The builder has not paid the amount in lumpsum . He is paying me in instalments . So when I have to pay the LTCG tax ? This property was transferred to my name in the year 2003 on death of my father by the housing society . So how to determine the cost of acquisition ?

Ans: » Taxability of the Amount Received for 78 Sq. Ft.

Your case needs to be looked at carefully because you are not simply selling a separate 78 sq. ft. property. Your society is under redevelopment, and because a flat matching your full entitlement was not available, you have surrendered 78 sq. ft. of your entitlement to the developer and are receiving money for it.

In principle:

The money received for surrendering this 78 sq. ft. entitlement can give rise to capital gains.
It should not automatically be treated as your normal income merely because the developer is paying cash compensation.
The exact tax treatment will depend heavily on the redevelopment agreement, individual agreement with the developer, possession/transfer documents and how the 78 sq. ft. entitlement has been described legally.
In particular, it is important to establish whether you have transferred part of your existing property/right, surrendered an additional development entitlement, or whether the amount is merely an adjustment in the redevelopment consideration.

This distinction is important before filing the return.

» Will It Be Long-Term Capital Gain?

From the facts given by you, there is a strong case for long-term capital gain treatment.

You inherited the property from your father. For an inherited capital asset, the holding period of the previous owner is generally considered along with your holding period.

Therefore, the fact that the housing society transferred the property to your name only in 2003 does not normally mean that your ownership period starts only from 2003 for capital-gains purposes.

Your fathers period of ownership can also become relevant.

So, assuming the amount represents consideration for transfer of a proportionate part of your long-held property/right, the resulting gain would generally be LTCG rather than STCG.

» What Is the LTCG Tax Rate?

For a transfer taking place on or after 23 July 2024, the general LTCG rate is:

12.5% without indexation, plus applicable surcharge and cess.

However, there is an important relief where land or building was acquired before 23 July 2024 and is transferred by a resident individual or HUF.

In such eligible cases, the tax liability under the new 12.5% without-indexation method is effectively compared with the tax under the earlier 20% with-indexation method, and the beneficial protection can apply.

This could be quite relevant in your case because this is an old property.

But there is one important issue. You are surrendering only 78 sq. ft. of entitlement as part of redevelopment. Therefore, your CA should first establish whether the transaction legally qualifies as transfer of a proportionate interest in land/building for this beneficial provision.

I would not suggest simply applying 12.5% to the entire amount received from the builder.

Capital gains tax is on the taxable capital gain, not automatically on the gross compensation received.

» Instalments Do Not Automatically Decide the Year of Tax

This is probably the most important point in your question.

You mentioned that the builder is not paying the amount in one lump sum. He is paying it in instalments.

It may appear logical to pay capital gains tax every year only on the instalment received during that year.

But capital gains taxation does not always work on a simple cash-receipt basis.

The key question is:

In which financial year did the transfer of your 78 sq. ft. right actually take place?

The relevant date could depend on:

Date of redevelopment agreement.
Date of your individual agreement with the developer.
Date on which you surrendered the entitlement.
Date on which your right became legally enforceable in favour of the developer.
Date of possession or other transfer event.
Terms governing payment of compensation.
Whether any special redevelopment/JDA tax provision applies to your transaction.

Therefore, receiving the compensation over 2 or 3 financial years does not necessarily mean that the capital gain can also be divided over 2 or 3 years.

For example, if the entire right was transferred in one financial year and the developer merely agreed to pay the fixed consideration later in instalments, tax may become relevant in the year recognised as the year of transfer.

So please do not decide the tax year only based on when each instalment enters your bank account.

» Special Point for Redevelopment Cases

Redevelopment has some special capital-gains provisions, particularly where an individual/HUF enters into a qualifying registered development agreement and receives a share in the developed project.

Under those provisions, the timing of capital gains can, subject to conditions, be linked to completion of the project rather than the earlier date of the development agreement.

Your situation has an additional layer because you are receiving a reconstructed flat and cash for the 78 sq. ft. surrendered.

So your CA needs to examine whether the special redevelopment provision applies to your agreement and, if yes, how the cash component should be dealt with.

This is one area where reading the actual agreement is much more useful than giving a generic tax answer.

» Cost of Acquisition Since You Inherited the Property

There is some good news here.

Since you inherited the property from your father, your cost does not simply become zero.

Generally, in an inheritance:

The cost at which the previous owner acquired the property becomes relevant.
The previous owners holding period is also relevant.
Therefore, we have to go back to your fathers acquisition rather than simply taking the 2003 society transfer as a fresh purchase by you.

Now there can be two situations.

» If Your Father Acquired the Property Before 1 April 2001

If your father acquired the property before 1 April 2001, you can generally consider the permitted cost based on the original cost or the Fair Market Value as on 1 April 2001, subject to the applicable tax provisions.

For land/building, the Fair Market Value adopted as on 1 April 2001 is also subject to the applicable stamp-duty-value restriction.

For an old property, obtaining a proper valuation as on 1 April 2001 can therefore become very important.

Do not use an approximate property price from the internet or a neighbours transaction.

A proper valuation report and supporting records would make the position much stronger.

» If Your Father Acquired It After 1 April 2001

In that case, generally his actual eligible acquisition cost becomes relevant.

You should try to locate documents such as:

Original purchase agreement.
Society share certificate and transfer records.
Payment records, if available.
Stamp duty and registration records.
Relevant capital improvement expenses.
Your fathers ownership documents.
Death certificate and inheritance/transmission documents.
Redevelopment agreement and your individual agreement with the developer.

Old documents can make a meaningful difference to the final capital gain.

» Cost Relating Specifically to the 78 Sq. Ft.

Another important point is often missed.

You are not transferring your entire property for cash. You are surrendering only 78 sq. ft. of your entitlement.

Therefore, the entire historical cost of your old property obviously cannot be deducted against the compensation for 78 sq. ft.

A reasonable proportion of the eligible cost attributable to the right surrendered would normally need to be identified, depending on the exact legal nature of that right.

This allocation needs careful documentation because the 78 sq. ft. may represent a proportionate property interest or a redevelopment entitlement rather than a separately purchased 78 sq. ft. asset.

This is another reason why the redevelopment agreement should be examined before the capital gain is calculated.

» Do Not Ignore TDS

Also check whether the developer has deducted or is required to deduct TDS from the payments made to you.

Keep:

Builder payment statements.
Bank statements.
TDS certificates.
Tax credit statement.
Annual information statement.
Redevelopment agreement.
Supplementary agreement for surrender of 78 sq. ft.

The TDS deducted by the developer is only a tax credit. It does not by itself determine your final capital-gains liability.

» Possible Capital Gains Exemption

Depending on the structure of the redevelopment and the nature of the consideration, capital-gains exemption provisions relating to a residential house may also need to be examined.

However, this cannot be decided only from the information in your question.

Your replacement flat, cash consideration, cost attributable to the surrendered portion, redevelopment agreement and timing of transfer all need to be considered together.

So it would be premature to assume that the entire calculated LTCG is necessarily taxable without checking available exemptions.

» What I Would Suggest You Do Now

Before paying the tax, ask your CA to review the complete transaction as one redevelopment transaction rather than treating the instalments as independent receipts.

Specifically, get clarity on:

What exactly has been transferred when you surrendered the 78 sq. ft.
Exact date/year of transfer for income-tax purposes.
Whether the special redevelopment tax provision applies.
Whether the gain qualifies as LTCG.
Whether 12.5% without indexation or the beneficial protection available for old land/building is relevant.
Your fathers original date and cost of acquisition.
Fair Market Value as on 1 April 2001, if applicable.
Proportionate cost attributable to the 78 sq. ft. surrendered.
Eligibility for any residential-property capital-gains exemption.
TDS already deducted by the developer.
Advance-tax implications if tax becomes payable before filing the return.

» Final Insights

Your 2003 inheritance does not mean that the cost of acquisition is nil. That is an important positive point.

Also, do not assume that every instalment received from the developer becomes taxable separately in the year you receive it. Capital gains normally revolve around the legally recognised date of transfer, and redevelopment transactions can have special timing provisions.

The cleanest approach would be to give your CA the redevelopment agreement, your individual agreement with the developer, the 78 sq. ft. surrender/compensation agreement and your fathers old property documents. Ask the CA to determine the year of transfer first. Only after that should the capital gain and tax rate be finalised.

Given that the property goes back to your father and is now part of a redevelopment transaction, proper documentation of the original acquisition and 1 April 2001 value, where relevant, can make a substantial difference.

Best Regards,

K. Ramalingam, MBA, CFP,

AMFI-Registered MFD – ARN 4188

www.holisticinvestment.in

https://www.linkedin.com/in/ramalingamcfp/