Under the Income Tax regulations, exchanging an old residential flat itself is regarded as an event triggering income tax liability.
New Delhi: There have been incidents where builders or developers decide on a reconstruction when old buildings developed by them begin to deteriorate. In such cases, the flat owners of such buildings agree to the redevelopment work as they are entitled to a new, redeveloped flat in the same place. But does receiving a new flat in exchange for old flats mean that the owner will have to pay income tax on it? Here’s what you need to know.
What ITAT Rule?
In a recent ruling, Mumbai ITAT (Income Tax Appellate Tribunal) said that getting a new flat under a redevelopment project in exchange for an existing residential flat is not taxable.
The bench said that exchange is merely the “extinguishment of rights in the old flat” and would not amount to “receipt of immovable property for inadequate consideration.”
What does the Income Tax Rule say?
Under the Income Tax regulations, exchanging an old residential flat itself is regarded as an event triggering income tax liability.
According to S Sriram, Partner at Lakshmikumaran and Sridharan Attorneys, the exchange ordinarily happens in a re-development scheme of an old building, where the owner is provided with a new flat (generally with a larger area and access to other amenities).
“Technically, in such situations, the owner gives up a portion of his right to/ undivided share in the land, on which the old flat existed,” he said.
Things to keep in mind
However, an individual flat owner who seeks to offer his flat for redevelopment by a builder, or himself redevelops it, would ordinarily not be liable to income-tax on the redevelopment, subject to certain exceptions.
“Firstly, the benefit can be claimed only by an individual or a Hindu Undivided Family (HUF). Secondly, the redevelopment project should be of a nature that is contemplated to be completed within a maximum of 3 years. Thirdly, to avail a complete exemption, the notional gains arising on the exchange shall be less than INR Ten Crores. Fourthly, the new flat that is acquired in exchange should not be transferred or sold within a period of 3 years from which it was acquired,” Sriram concluded.
