Under Section 54 of the Income Tax Act, 2025 an individual can claim a deduction on Long-Term Capital Gains (LTCG) arising from the sale of a residential property by reinvesting the proceeds into another residential flat. To qualify for this deduction, the reinvestment must occur within a specific time window:
Purchase: One year before or two years after the sale of the original asset.
Construction: Three years after the sale of the original asset.
In the reported case in[2026] 183 taxmann.com 517 (Mumbai – Trib.)[13-02-2026] the assessee has entered into an agreement for purchase of new flat under-construction in respect of which the purchase consideration has been fixed and payable in instalments, based on construction to be carried out, from time to time.
In the corresponding the sale of the original asset took place after one year of the booking such under-construction flat of which possession is received subsequently with 2 years from the date of sale of original asset. The Tax Officer earmarked the booking date as date of purchase of under-construction flat which fell more than one year before the date of sale hence he denied the claim for deduction u/s 54. The assessee on the other hand contended that possession of the constructed flat was received within two years from the date of transfer of the original asset, and therefore the exemption under section 54 should be allowable.
In clearing the air the Tribunal held that the emphasis u/s 54 is on purchase of a residential house whereby the assessee discharges its obligation of paying the requisite purchase consideration and take over the possession of fully constructed residential house. Therefore, the relevant date to be considered for the purposes of section 54 is date of possession and not date of booking.
Nonetheless it is also to be noted that for private under-construction builder flats the transaction is treated as a purchase, not a construction. Consequently, there is only a 2-year window available after the sale of the original asset not the 3-year period often mistakenly claimed by drawing parallels to D.D.A. schemes and Board Circulars No.471, dated 15-10-1986 and No. 672, dated 16-12-1993 which are in the context of allotment of flats under the Self-Financing Scheme of the Delhi Development Authority for which a specific allotment letter is issued often called as allotment by draw of lots where the allottee gets title to the property on the issue of allotment letter and the payment of instalments is considered only a follow up action and taking the delivery of possession only a formality.