Under-construction counts as construction: three years, not two
It helps that the law treats buying an under-construction flat, or self-building, as construction rather than purchase. That matters because the reinvestment windows differ: you have two years after the sale to buy a ready house, but three years to construct one. So committing your gain to an under-construction flat gives you the longer three-year runway to complete it, which is often exactly why sellers choose that route.
The condition is that construction, meaning completion and possession, has to happen within that three-year window measured from the date of the original sale. So the clock is not the builder's completion date in the abstract; it is three years from when you sold. Lining the project timeline up against that date is the first thing to check before you commit the gain.
The builder-delay risk, and the protection
Here is the real exposure. If the flat is not completed within three years, the strict reading of the rule denies the exemption, and the gain you thought was sheltered becomes taxable, through no failure of your own but because the developer ran late. For an NRI who committed the whole gain to a delayed project, that is a serious risk.
The courts have, repeatedly, come to the rescue. A consistent line of decisions holds that where the buyer invested the money in time and the delay was the builder's fault, the exemption should not be denied, treating these reinvestment provisions as beneficial and to be read liberally, and reckoning the period from when the builder actually handed over possession. This is genuine protection, but it is case law, not the black-letter rule, so the assessing officer can still deny the exemption at assessment and leave you to win it on appeal. It is a defence, not a guarantee.
How to be safe, and the TDS at the sale
Because the protection is a litigation position, the sensible course is not to rely on it. Structure the reinvestment so the payments are made well inside the window, keep the evidence that you invested the gain in time and that any delay was the builder's, and, where possible, pick a project whose timeline realistically completes within three years of your sale. Where a delay is looming, a practising CA documents the position so that, if it is questioned, the defence is ready.
At the point of the original sale, the exemption also feeds the TDS. Because you intend to reinvest, a Form 13 lower-deduction certificate lets the buyer of your property withhold under Section 195 on the reduced or nil taxable gain rather than the gross price, so your money is not locked up while the new flat is being built. A CA lines up the certificate, the reinvestment and the return together.