Section 54 of the it act
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
22 August 2014
Post the changes in Section 54 in the recent budget, I have the following query :
I own a flat in a housing Society which has over 200 members. The Society is under redevelopment by one of the top 5 Developers in Mumbai. As per the terms of the Development Agreement each member shall get double the area that he currently owns post redevelopment. Hence I am eligible for 2 independent residential units in the redeveloped Society in lieu of one. These 2 units may be on different floors.
Will there be any tax incidence on the allotment of these 2 units?
If yes how will the same be calculated?
Can someone pls revert.
I own a flat in a housing Society which has over 200 members. The Society is under redevelopment by one of the top 5 Developers in Mumbai. As per the terms of the Development Agreement each member shall get double the area that he currently owns post redevelopment. Hence I am eligible for 2 independent residential units in the redeveloped Society in lieu of one. These 2 units may be on different floors.
Will there be any tax incidence on the allotment of these 2 units?
If yes how will the same be calculated?
Can someone pls revert.
22 August 2014
Your cost of construction of two new independent flats will be your sale consideration. Kindly ask the developer to mention cost of construction (per sq ft) in development agreement.
Arrive at the indexed cost of acquisition of old flat.
Then arrive at long term capital gains.
Arrive at the indexed cost of acquisition of old flat.
Then arrive at long term capital gains.
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22 August 2014
i believe the problem you are facing is whether or not you get exemption given that both flats are on separate floors. Given the change in section 54, you get exemption for both houses. Only the cost of one house can be claimed as exemption under section 54. the cost of second flat will be taxable gains against which you may get exemption if you invest under section 54EC
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Querist : Anonymous
Querist :
Anonymous
(Querist)
09 September 2014
Dear Mr Nikhil Kaushik,
Thanks for your revert. So what I understand from you reply above is as follows :
If on redevelopment, if I get 2 flats say RD1 (ie redeveloped flat 1) & RD2, then for one flat (say RD1) I can take benefit of "indexed cost of acquisition of old flat" whereas for the second flat (RD2) the COA will be considered as ZERO.
Is my above understanding correct?
If yes, at what stage do Capital Gains arise? Is it at the
a) time of allotment of 2 flats in lieu of 1 OR
b) Is it at the time of registration of the Redeveloped flats OR
c) Is it at the time of Sale od the Redeveloped Property (RD2 in the above example)
Revert on the above would be extremely helpful.
Rgds
Thanks for your revert. So what I understand from you reply above is as follows :
If on redevelopment, if I get 2 flats say RD1 (ie redeveloped flat 1) & RD2, then for one flat (say RD1) I can take benefit of "indexed cost of acquisition of old flat" whereas for the second flat (RD2) the COA will be considered as ZERO.
Is my above understanding correct?
If yes, at what stage do Capital Gains arise? Is it at the
a) time of allotment of 2 flats in lieu of 1 OR
b) Is it at the time of registration of the Redeveloped flats OR
c) Is it at the time of Sale od the Redeveloped Property (RD2 in the above example)
Revert on the above would be extremely helpful.
Rgds
23 July 2025
You're dealing with a common and complex issue in Mumbai and other urban areas: **redevelopment of a housing society** where an existing owner receives **multiple residential flats in lieu of one** under a development agreement.
Let’s address your queries point by point based on **Section 54 of the Income Tax Act**, **judicial precedents**, and **CBDT interpretations**.
---
### 🧾 **Facts Recap**:
* You owned **1 residential flat**, which is now undergoing redevelopment.
* As per the **Development Agreement**, you’ll receive **2 flats** (likely with extra carpet area) in exchange.
* You’re concerned about:
1. Whether **capital gains** apply.
2. Whether **Section 54 exemption** applies if you get **2 flats**.
3. **When** capital gains arise (timing of taxation).
---
### ✅ 1. **Is there any capital gains tax on getting 2 flats instead of 1 under redevelopment?**
**Yes**, **capital gains tax** *can* arise — but only if you are receiving more than what is covered under exemption.
However, courts have repeatedly held that when you **surrender one flat and get two flats in lieu of that**, it's not necessarily "profit" unless:
* There is **additional consideration** (e.g., cash or commercial units), or
* The area received is **significantly more**, beyond reasonable expectations in redevelopment.
---
### ⚖️ **Case Law Support:**
#### 🏛️ *CIT v. Balbir Singh Maini* \[(2017) 398 ITR 531 (SC)]
> Capital gains do not arise **merely on signing a development agreement** unless there is a **transfer under Section 2(47)**.
#### 🏛️ *CIT v. D. Ananda Basappa* \[(2009) 309 ITR 329 (Karnataka HC)]
> Exemption under Section 54 allowed for **investment in two flats**, even though the section mentioned “*a* residential house”.
#### 🏛️ *CIT v. Gita Duggal* \[(2013) 357 ITR 153 (Delhi HC)]
> Held: **More than one flat received** on redevelopment qualifies for **Section 54 exemption** if it is part of **a single composite transaction**.
---
### ✅ 2. **Can I claim Section 54 exemption for both flats (RD1 & RD2)?**
For **Assessment Years prior to AY 2020–21**, the **courts allowed multiple flats** under Section 54 if:
* They were received **as part of a single investment**.
* Located in the **same building or compound**.
In your case (post-FY 2014–15, but **before Finance Act 2019 amendments**), yes, **both flats** can qualify **if they form a part of one unified right/transaction** — which is the case in most redevelopment scenarios.
🔔 **However**, after **Finance Act 2019 (effective AY 2020–21 onwards)**:
* Section 54 specifically allows **exemption only for one residential house** — unless the capital gain does **not exceed ₹2 crores**, in which case exemption is allowed for **two houses**, but **only once in a lifetime**.
So, **depending on your sale date**, you may or may not be eligible for both flats.
**For FY 2012–13 to FY 2018–19**, courts generally allowed **both flats** if part of one redevelopment deal.
---
### 📅 3. **When does capital gains tax arise?**
Here's the timing clarification:
| Event | Does Capital Gains arise? |
| ------------------------------------------------- | --------------------------------------------------------------------------- |
| a) **Signing of Development Agreement** | ✅ If possession is handed over, it's a **transfer under Section 2(47)** |
| b) **Allotment of redeveloped flats (RD1 & RD2)** | ✅ If this is the point of transfer/possession, **capital gains arise here** |
| c) **Registration of new flats** | 🚫 Not relevant for timing — it's just legal formality |
| d) **Sale of redeveloped flat (RD2)** | ✅ New LTCG will arise here if/when you sell RD2 later |
➡️ **So, capital gains arise at the time of "transfer"**, which is usually the **date when possession of the original flat is handed over to the developer** under the development agreement — **not** the date of flat allotment or registration.
---
### 🧮 4. **Cost of Acquisition & Capital Gains Computation**
* **Sale consideration** = FMV (or cost of construction) of new flats (RD1 + RD2)
* Ask developer to give cost of construction or FMV.
* **Cost of acquisition** = Indexed cost of the original flat
* **Capital Gain** = Sale consideration – Indexed cost of acquisition
➡️ You can claim **exemption under Section 54** to the extent of **investment in residential house property (i.e., cost of RD1 and/or RD2)**.
If you can't claim full exemption under Section 54 (e.g., due to limit of one house post-FY 2019), then consider:
* **Section 54EC** – invest up to ₹50 lakh in REC/NHAI bonds within 6 months.
---
### 📝 Conclusion
* You are **eligible for Section 54 exemption**, possibly for **both RD1 & RD2**, if your case is **prior to FY 2019–20** or gain < ₹2 crores and you haven’t claimed the 2-house option before.
* **Capital gains arise at the time of transfer**, usually when **possession is handed over** to the developer under the development agreement.
* Carefully get the **cost of construction per flat from the builder** for accurate capital gains computation.
* If excess capital gain exists (i.e., cost of only one flat allowed), consider **investing under Section 54EC**.
---
Would you like a sample capital gains computation format based on your case?
Let’s address your queries point by point based on **Section 54 of the Income Tax Act**, **judicial precedents**, and **CBDT interpretations**.
---
### 🧾 **Facts Recap**:
* You owned **1 residential flat**, which is now undergoing redevelopment.
* As per the **Development Agreement**, you’ll receive **2 flats** (likely with extra carpet area) in exchange.
* You’re concerned about:
1. Whether **capital gains** apply.
2. Whether **Section 54 exemption** applies if you get **2 flats**.
3. **When** capital gains arise (timing of taxation).
---
### ✅ 1. **Is there any capital gains tax on getting 2 flats instead of 1 under redevelopment?**
**Yes**, **capital gains tax** *can* arise — but only if you are receiving more than what is covered under exemption.
However, courts have repeatedly held that when you **surrender one flat and get two flats in lieu of that**, it's not necessarily "profit" unless:
* There is **additional consideration** (e.g., cash or commercial units), or
* The area received is **significantly more**, beyond reasonable expectations in redevelopment.
---
### ⚖️ **Case Law Support:**
#### 🏛️ *CIT v. Balbir Singh Maini* \[(2017) 398 ITR 531 (SC)]
> Capital gains do not arise **merely on signing a development agreement** unless there is a **transfer under Section 2(47)**.
#### 🏛️ *CIT v. D. Ananda Basappa* \[(2009) 309 ITR 329 (Karnataka HC)]
> Exemption under Section 54 allowed for **investment in two flats**, even though the section mentioned “*a* residential house”.
#### 🏛️ *CIT v. Gita Duggal* \[(2013) 357 ITR 153 (Delhi HC)]
> Held: **More than one flat received** on redevelopment qualifies for **Section 54 exemption** if it is part of **a single composite transaction**.
---
### ✅ 2. **Can I claim Section 54 exemption for both flats (RD1 & RD2)?**
For **Assessment Years prior to AY 2020–21**, the **courts allowed multiple flats** under Section 54 if:
* They were received **as part of a single investment**.
* Located in the **same building or compound**.
In your case (post-FY 2014–15, but **before Finance Act 2019 amendments**), yes, **both flats** can qualify **if they form a part of one unified right/transaction** — which is the case in most redevelopment scenarios.
🔔 **However**, after **Finance Act 2019 (effective AY 2020–21 onwards)**:
* Section 54 specifically allows **exemption only for one residential house** — unless the capital gain does **not exceed ₹2 crores**, in which case exemption is allowed for **two houses**, but **only once in a lifetime**.
So, **depending on your sale date**, you may or may not be eligible for both flats.
**For FY 2012–13 to FY 2018–19**, courts generally allowed **both flats** if part of one redevelopment deal.
---
### 📅 3. **When does capital gains tax arise?**
Here's the timing clarification:
| Event | Does Capital Gains arise? |
| ------------------------------------------------- | --------------------------------------------------------------------------- |
| a) **Signing of Development Agreement** | ✅ If possession is handed over, it's a **transfer under Section 2(47)** |
| b) **Allotment of redeveloped flats (RD1 & RD2)** | ✅ If this is the point of transfer/possession, **capital gains arise here** |
| c) **Registration of new flats** | 🚫 Not relevant for timing — it's just legal formality |
| d) **Sale of redeveloped flat (RD2)** | ✅ New LTCG will arise here if/when you sell RD2 later |
➡️ **So, capital gains arise at the time of "transfer"**, which is usually the **date when possession of the original flat is handed over to the developer** under the development agreement — **not** the date of flat allotment or registration.
---
### 🧮 4. **Cost of Acquisition & Capital Gains Computation**
* **Sale consideration** = FMV (or cost of construction) of new flats (RD1 + RD2)
* Ask developer to give cost of construction or FMV.
* **Cost of acquisition** = Indexed cost of the original flat
* **Capital Gain** = Sale consideration – Indexed cost of acquisition
➡️ You can claim **exemption under Section 54** to the extent of **investment in residential house property (i.e., cost of RD1 and/or RD2)**.
If you can't claim full exemption under Section 54 (e.g., due to limit of one house post-FY 2019), then consider:
* **Section 54EC** – invest up to ₹50 lakh in REC/NHAI bonds within 6 months.
---
### 📝 Conclusion
* You are **eligible for Section 54 exemption**, possibly for **both RD1 & RD2**, if your case is **prior to FY 2019–20** or gain < ₹2 crores and you haven’t claimed the 2-house option before.
* **Capital gains arise at the time of transfer**, usually when **possession is handed over** to the developer under the development agreement.
* Carefully get the **cost of construction per flat from the builder** for accurate capital gains computation.
* If excess capital gain exists (i.e., cost of only one flat allowed), consider **investing under Section 54EC**.
---
Would you like a sample capital gains computation format based on your case?
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