Taxation and Reporting - Redevelopment of building

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Suraj (Querist)
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18 February 2025 Dear Sir / Madam,

I would like to understand taxation in simple terms in the case of the redevelopment of a building for its members. I have read a few articles but did not get clarity on taxation and its reporting in the ITR etc. My queries are as follows:

This building is a Pagdi building situated in Mumbai, where the tenants have come together for the redevelopment of the building through a developer. They will receive 450 sqft in exchange for their earlier 240 sqft. The building was constructed in 1945.

There are two types of tenants: A) Tenants who are not going for additional area other than what they are eligible for, i.e., 450 sqft. B) Tenants who are going for additional area beyond what they are eligible for, i.e., may go up to 600 sqft.

The development agreement is entered into on 14-02-2025. All tenants are opting for flat in exchange of their property.

My questions are as follows:

1) Is the tenant required to show this transaction in their ITR for AY 2025-26 as a sale of property to developer? If yes, what could be the cost price and sale value? Will there be any capital gain in both cases mentioned above?
2) Is the tenant required to obtain a valuation report as of 01-04-2001 and 14-02-2025?
3) If not shown in AY 2025-26, and the construction is completed after two years, say on 14-02-2027, is the tenant required to show this transaction in the ITR for AY 2027-28? What would the cost price and sale value be in this case?
4) Is the rent received from the developer for relocation to another place taxable?
5) Is any hardship allowance received taxable in the hands of the tenant?
6) Is GST payable by the tenant at any point during the entire redevelopment process?

I would be grateful if someone could clarify the above points and provide any additional considerations from a taxation and ITR reporting perspective.

Thanks & Regards,
Suraj

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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12 August 2025 Hi Suraj, your queries on the redevelopment of a pagdi building and related taxation are quite common and important. I’ll explain each point clearly and simply:

1) Is the tenant required to show this transaction in their ITR for AY 2025-26 as a sale of property to developer?
Yes, this transaction is treated as a transfer under Income Tax.

Cost price (cost of acquisition): Usually, it’s the cost of the original property (purchase price or stamp duty value at the time of acquisition).

Sale value: The market value of the property transferred to the developer as on the date of agreement (14-02-2025), or the value of new flat allotted to tenant.

Capital gains:

For tenants opting for only their eligible area (450 sqft): Capital gain is computed based on the difference between sale consideration and cost price.

For tenants opting for additional area (600 sqft): The value of the additional area may be treated as sale of new asset (with separate capital gains implications).

Important: If the transaction is considered “exchange” of old flat for new flat, it is a transfer triggering capital gains.

2) Is the tenant required to obtain a valuation report as of 01-04-2001 and 14-02-2025?
For capital gains computation, you need the cost of acquisition as of 01-04-2001 or actual acquisition cost, whichever is higher (for long-term capital gains).

So yes, valuation as of 01-04-2001 (cost inflation index) may be required for benefit of indexation.

Also, valuation as of the date of agreement (14-02-2025) is required to determine sale consideration or fair market value.

3) If not shown in AY 2025-26 and construction completed in AY 2027-28, how to report?
The date of transfer is the date of agreement (14-02-2025), so capital gains liability arises in AY 2025-26.

Even if possession or construction is completed later (in AY 2027-28), the transaction is considered transferred on the agreement date.

So you must report capital gains in AY 2025-26.

Sale value and cost price are as explained above, based on agreement date.

4) Is rent received from developer for relocation taxable?
Yes, rent or compensation received for temporary relocation is taxable as income from other sources in the year of receipt.

5) Is hardship allowance received taxable?
Any hardship allowance or compensation received by tenant is taxable as income from other sources.

6) Is GST payable by tenant at any point?
Normally, GST is applicable on the supply of goods/services, i.e., by the developer.

Tenants are not liable to pay GST on receiving the flat or compensation; GST is payable by the developer on construction services.

If tenant is paying consideration for additional area, GST may be applicable on that amount, payable by developer.

Additional points:
Tenants must retain all agreement documents, valuation reports, and payment receipts for income tax and stamp duty purposes.

Consult a Chartered Accountant or tax expert to assist with capital gains computations and proper reporting in ITR.

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