Property, Sale

Buying an under-construction flat to save the tax, and the delay risk

You are putting the gain into an under-construction flat to claim the exemption, and you are worried what happens if the builder runs late.

To save the capital-gains tax on an Indian sale, you are reinvesting in an under-construction flat, or building a house, rather than buying a ready one. That gives you more time, but it also introduces a risk that a ready-house purchase does not: the builder. If the project slips and possession comes late, you could find the exemption you were relying on is questioned, on a delay that was never in your control. There is a real risk here, and there is also a line of protection, and it is worth knowing both before you commit.

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Last reviewed: 26 July 20267 min readReviewed by Preetesh Maloo, CA

The short answer

Buying an under-construction flat, or constructing a house, to claim Section 54 or 54F is treated as construction, so you get three years from the sale to complete it, not the two years allowed for buying a ready house. The risk is the builder: if construction is not completed within three years, the strict rule denies the exemption. Courts have repeatedly protected buyers whose builder delayed through no fault of their own, provided the money was invested in time, but that is a litigation position, not a guarantee. So the deal and the payments should be structured to sit inside the window, and the reinvestment documented, rather than relying on a court later.

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Related situations

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.

What's involved

What the CA actually does

1
We map the project to the three-year window
We check the flat's realistic completion date against the three years from your sale, so you commit the gain knowing whether the timeline works.
2
We document the reinvestment
We keep the trail that you invested the gain in time, which is what the courts have relied on to protect buyers against builder delay.
3
We build the defence if it is questioned
Where the builder runs late, we assemble the case-law position and the evidence so the exemption can be defended at assessment or appeal.
4
We handle the TDS at the sale
We file a Form 13 so the buyer withholds on your reduced or nil gain, and carry the exemption into your return.

What to have ready

Documents you'll typically need

The under-construction flat's booking and payment schedule
The builder's timeline and any evidence of delay
The original property sale and its gain
Records of the gain invested in the new flat

Your destination country can change the details

Requirements differ from one consulate, university and visa route to the next, how recent the figures must be, how long funds must have been held, and which certificates are mandatory. We assemble the documents around the exact checklist you're applying under. To see how India's tax treaty with your country of residence affects related filings, set your country below or compare all 46 countries.

References on this page

Buying an under-construction flat is treated as construction: a 3-year completion window, not the 2-year purchase window
The strict rule denies the exemption if construction is not completed within 3 years of the sale
Courts have allowed the exemption where the builder delayed through no fault of the buyer (case law, not statute)
Section 195 TDS and a Form 13 certificate reflect the exemption at the earlier sale

Frequently asked questions

Common questions

Three years from the sale, because buying an under-construction flat or building a house is treated as construction, which carries a three-year window rather than the two years for buying a ready house.

The strict rule denies the exemption. But courts have repeatedly protected buyers where the money was invested in time and the delay was the builder's fault, reading these provisions liberally and counting from actual possession. It is a defence, not a guarantee, so it is best not to rely on it.

Structure the payments well inside the window, keep evidence that you invested the gain in time and that any delay was the builder's, and choose a project that realistically completes within three years of your sale. A CA documents the position so it can be defended if questioned.

Yes. Because you intend to reinvest and claim the exemption, a Form 13 certificate lets the buyer withhold under Section 195 on your reduced or nil taxable gain rather than the gross price, so your money is not locked up while the flat is built.

The exceptions that change the answer

Where the general rule stops applying to you

Every rule below has a carve-out, a cut-off date or a condition that flips the answer. These are the ones that decide real cases.

Cap on s.54 and s.54F exemption

Right now: Rs 10 crore

Where it works differently

The replacement house is outside India: No exemption. The house must be in India.; 'in India' was inserted by Finance Act 2014, from AY 2015-16. This is the single most important s.54 point for NRIs.
Claiming s.54F: The ENTIRE net consideration must be reinvested, not just the gain, and the taxpayer must not own more than one other residential house. A house owned ABROAD counts.; Proviso to s.54F(1).

Commonly got wrong

An NRI can claim s.54 by buying a house abroad. The replacement property must be in India since AY 2015-16.The new house must be in India.
s.54 and s.54F both need only the gain reinvested. s.54 needs the gain; s.54F needs the whole net consideration.Section 54 requires only the capital GAIN to be reinvested. Section 54F requires the entire NET CONSIDERATION. Both cap the exemption at Rs 10 crore, and both need the new house to be in India.

Section 54 reinvestment time windows

Right now: Purchase within 1 year before or 2 years after the transfer; construction within 3 years

Where it works differently

The return due date arrives before the purchase: The unutilised gain must be deposited in a Capital Gains Account Scheme account BEFORE the due date, or the exemption is lost.; s.54(2). The single commonest way NRIs lose this exemption.
The gain came from an under-construction flat: The holding period runs from the allotment date in most rulings, not from possession.; Settled by several ITAT and High Court decisions.
The new house is sold within three years: The exemption is withdrawn and taxed in the year of that sale.; s.54(1) proviso.

Commonly got wrong

You have two years to reinvest, so no action is needed before filing. If the due date falls first, the money must sit in a CGAS account by then.You have two years to buy, but if your filing due date comes first, park the unutilised gain in a Capital Gains Account Scheme account before that date or the exemption goes.

When the rule was applied against someone else

A taxpayer in this position won

The rule reads as settled. These are decisions where it was applied to someone in your situation and did not hold, with the exception that carried them and a link to the source.

The rule said no. This taxpayer still won.Settled law

What the rule looks like: Sections 54 and 54F give you three years to CONSTRUCT the new house. Read literally, if construction is not finished in three years the exemption is gone, and assessing officers apply it that way.

The exception that applied: The section is aimed at INVESTMENT, not completion. A builder's delay is outside the taxpayer's control and does not undo an investment already made in time.

What was actually decided: Exemption allowed. The thrust of the section is on INVESTMENT, not on completion. Where the taxpayer put the gain into the new house within the statutory window, benches have refused to deny relief because the builder was late. One bench held the completion date irrelevant where ownership was transferred within the statutory period.

What the win turned on

The capital gain was actually invested inside the statutory window. The money moved, and it can be traced
The delay was the builder's, not the taxpayer's; correspondence chasing the builder helps a great deal
A substantial part of the gain went in, not a token amount
Unutilised gain was parked in a Capital Gains Account Scheme account before the return due date

These are the facts that decided it. If none of them describe your situation, this case will not carry you, and a CA will tell you that before you spend anything.

How far this carries: A line of tribunal and High Court decisions rather than a single binding authority, and it is fact-sensitive. It does not rescue someone who never invested the gain in time.

ITAT and High Court decisions on delayed construction under sections 54 and 54F, ITAT Bangalore and other benches; a consistent line rather than one reported case.Verify it yourself: livelaw.in · taxscan.in · cassie.in

Think this is your situation?

Send us the notice or the order. A chartered accountant will tell you whether the facts line up, what evidence you would need, and what it would cost to contest it. If your facts do not fit, you will be told that too.

Ask a CA if you have a case

A chartered accountant can represent you through assessment, the Commissioner (Appeals) and the Tribunal under section 288. The High Court and Supreme Court need an advocate, and we will say so if it gets that far. Nothing here is a prediction of your outcome.

If this matched your situation, these go further

Saving capital-gains tax by reinvesting in another house (Section 54)You have not reinvested yet, and the return is due: the CGAS lifeline Tax when your old flat goes into redevelopment Form 13 lower-TDS certificate (property sale)NRI ITR filing (we file for you)DTAA TDS recovery Capital gains calculator Property sale TDS calculator

Reinvesting in an under-construction flat?

Tell us the sale date and the project timeline. A practising CA will check the window and protect the exemption on a free call, no obligation.