Capital Gain on development of property.

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This query is : Resolved

Sagar Diwakar (Querist)

20 May 2025 A bungalow owner is giving his property to developer for redevelopment. Developer will be developing the property and in exchange he will give two flats to the bungalow owner out of six which he will construct. The remaining four flats will be the property of developer. Developer will also give monetary benefit of Rs. Tweny Lakhs to the bungalow owner. A bungalow is the old residential property and the base cost will be of 01.04.2001 after having a valuation report by the valuer.
What will be the capital gain in this case? Also guide for the relevant section and orders or decisions with similar to this incident.

Many thanks

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

12 August 2025 This is a classic case of Capital Gains on redevelopment agreement where the original owner transfers property to a developer in exchange for part ownership of the redeveloped flats plus monetary consideration.

Key points and tax treatment:
1. Nature of transaction:
Owner transfers the old bungalow to the developer.

In exchange, owner receives:

Two flats out of six constructed flats.

Monetary benefit of Rs. 20 lakhs.

This is treated as a transfer under Income Tax Act, triggering capital gains.

2. Valuation and Cost of acquisition:
The cost of acquisition will be the cost as of 1st April 2001 (if property held before that date) or actual cost if purchased after that.

You rightly mentioned valuation report by registered valuer to establish fair market value (FMV) as of 1/4/2001 for indexed cost computation.

3. Capital gains computation (Section 45(5)):
Under Section 45(5) of Income Tax Act, the transfer of property to developer is treated as capital gains on the date when possession/control is handed over.

The consideration for transfer is the aggregate of:

Fair market value (FMV) of the two flats allotted to the owner (determined on the date of transfer or as per agreement)

Monetary benefit received (Rs. 20 lakhs)

Capital Gains = (FMV of two flats + Rs. 20 Lakhs) – Indexed Cost of Acquisition of bungalow.

4. Important clarifications:
The developer’s 4 flats do not concern the original owner’s capital gains calculation.

The owner can claim indexation benefit on the cost of acquisition (based on valuation as of 1/4/2001).

If the owner holds the bungalow for more than 24 months (as per current rules), it qualifies as long-term capital asset.

5. Relevant sections and judicial precedents:
Section 45(5) of Income Tax Act (introduced in Finance Act 2007) specifically deals with capital gains on redevelopment transactions.

CIT vs. P. Mohanraj (SC 2011) upheld this principle of treating allotment of flats + monetary consideration as capital gains.

CBDT Circular No. 1/2018 clarifies capital gains on redevelopment agreements.

ITAT and High Courts have consistently ruled in line with above treatment.

Summary formula for Capital Gains:
Capital Gains
=
(
FMV of 2 flats
+
Monetary benefit of Rs. 20 Lakh
)
−
Indexed Cost of Acquisition of bungalow
Capital Gains=(FMV of 2 flats+Monetary benefit of Rs. 20 Lakh)−Indexed Cost of Acquisition of bungalow

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