Elegibility of CG Tax exemption in self construction

Income Tax Act 1961 Income from Capital Gains
1

Dear Experts ,

Pl suggest what best can be done in this case to avail the CG exemption claimed. Construction was stopped as I had to move abroad urgently. .

Slightly before the end of 3 year period , GF was almost complete. Only front doors were to be fixed , doors fpr both floors very ready but were not fixed because of labour and material movements. and FF about 80 to 90% complete. I got the doors fixed after a few days. All Electrical & plumbing works completed. Water & electricity connections obtained. Kitchens ready, baths ready . tiling work on GF over and on FF 80% done. Lights on the walls and all sockets & switches were working. As I had plans for false ceiling later , I had postponed the work of ACs , fans and ceiling lights. The fans , all lights & lamps and ACs were purchased within the 3 year period. The boundary wall done with tiles and 2 gates. Balcony grill installed. stairs made , not tiled but usable..

Self constructed. No completion certificate obtained. No photos .No such precaution was taken as it was presumed the house will be completed in time. No permission to construct was required from any kind of authority , either before or after the construction the plot size being small. My size does not even attract house tax.

85 % spent buying a plot and construction of the house by DD from CG account. 15% spent from the cash withdrawn from CG account. Extra 5 % by cheques from other accounts. 5% from personal cash. Full consideration + 8 lakhs personal spent before the 3 year period.

Which expenditures should be shown and not shown ? Some small upto 500- 2000 cash bills are not available , simply because they are not given as per practice , for example water tankers (Rs 500) , tractors (Rs 800) for debris removal etc. What is the correct way to include those also. A big sum in cash was spent on labour, various artisans & masons on a daily basis as the house was self-made. How to present this expenditure.

Initially , to me it appeared to be a situation where CG tax will have to be paid . but when I discussed this with friends , they suggested to explore legally the possibility of avoiding or reducing the CG tax.

I will be grateful if the following are answered :

How to show the full construction trail in the absence of a completion certificate?

What is the best scenario and how to get that?.

What is the worst scenario and how to avoid that?.

Is some penalty also levied for non- completion?

How to correctly present the full case in the ITR 2? Which date to show that the construction has been completed?

Does GF being complete save the situation ? Should I only claim for GF and forget about FF ?

How much amount is allowed for unbilled cash expenditure.

Is it investment of the full consideration or the actual complete construction with 3 years that matters for claiming the exemption.

Thanks in anticipation for help.

2

Hey @nirman

Exemption under section 54/54F can be claimed if construction is substantially completed within 3 years; a completion certificate is not mandatory. If the house is habitable, minor pending work does not affect the claim.

In your case, with basic structure, utilities, kitchen and bathrooms ready, it qualifies as substantial completion. Do not restrict claim to ground floor; claim full exemption.

Show total investment, maintain bank trail, and prepare an affidavit explaining construction and delay. Cash expenses and small missing bills can be reasonably included if supported by withdrawals.

Take completion date as when the house became habitable. If full consideration is invested and construction is largely complete, exemption should generally be allowed.

Hope this helps !!

3

Thanks a lot for your clarifications. Can you please give any CBDT circular or case laws which are binding on CITs in this matter . Can AO at the time of approving Form G raise any objections . If yes , what queries he can possibly raise. Is he working under any guidelines or prescribed scope while dealing with Form G ? can he also raise queries regarding completion , once assessment has been done favourably ? If yes , how to satisfy & convince him about completion? Initially, I had engaged a contractor on a verbal agreement. But he abandoned the site in between and I was forced to complete the work myself as no other contractor was willing to take up an unfinished site. Will this factor help and should be highlighted ?

4

Hey @nirman

Although there is no such CBDT circulars but case laws like Sardarmal Kothari and B.S. Shanthakumari support that exemption depends on investment and not strict completion.

For Form G, AO/bank may ask about purpose, utilization and linkage with construction. Scope is limited but genuineness can be checked.

Completion can still be examined later if not properly verified.

To justify, show habitability, fund flow and give an affidavit. Contractor leaving midway is a valid reason and should be highlighted.

Overall, focus on full investment and substantial completion.

5

Thanks a lot Mr. Priyanshu for the case laws. you immediately gave me the case laws . that means you keeop coming acroos this completion problem quite a lot . do many people face this problem I will read in detail about these two cases. Any other precaution you may think of .

6

while reading for the 2 cases you suugested , I have noticed that in many cases , reliance has been place on this circular for supporting investment in 3 years rather than completion. Is this interpretation correct ? Circular No. 471, dated 15 October 1986
428. Capital gains from long-term capital asset - Investment in a flat under the self-financing scheme of the Delhi Development Authority - Whether to be treated as construction for the purposes of capital gains

  1. Sections 54 and 54F provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of the transfer.
7

Hello @nirman

Yes, your interpretation is correct, the income tax act considers the investment for construction of property rather than completion. The income tax act no where mentions that exemption will not be available if construction is through self finance hence the exemption would be still available in your case.

Hope this helps !!

8

Applicable Law

Mainly covered under:

  • Section 54 → for sale of residential property

  • Section 54F → for sale of any other asset (like land, shares)

:white_check_mark: Eligibility for Self-Construction

You can claim exemption if you construct a house instead of buying one.

Key Conditions:

1. Time Limit :three_o_clock:

  • Construction must be completed within 3 years from the date of sale

2. Location :round_pushpin:

  • Property must be in India

3. Ownership :receipt:

  • The new house should be:

    • In your name (or jointly with spouse in some cases)

4. Number of Houses :houses:

  • Under Section 54F:

    • You should not own more than one residential house (on the date of sale), excluding the new one

5. Investment Requirement :money_bag:

Under Section 54:

  • Invest capital gains amount

Under Section 54F:

  • Invest full sale consideration
    (Otherwise exemption is partial)

:brick: Special Points for Self-Construction

:check_mark: Allowed Expenses:

  • Land purchase cost

  • Construction cost (materials, labor, contractor payments)

9

If full consideration is invested and construction is largely complete, exemption should generally be allowed. Do you agrre ?

10

Hello @nirman

Yes, the exemption in such cases.