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May 24, 2024
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Key Tax Benefit for NRIs: Date of House Possession Crucial for Section 54 Exemption

The recent ruling by the Income-tax Appellate Tribunal (ITAT) in Mumbai offers significant relief and clarity for NRIs investing in under-construction properties in India. This decision is especially relevant for non-resident Indians (NRIs) seeking to avail tax benefits under Section 54 of the Income-tax (I-T) Act.


Understanding Section 54 and Its Benefits

Under Section 54, NRIs can benefit from tax exemptions on long-term capital gains arising from the sale of a property. To qualify, the capital gains must be reinvested in a new residential property within a specified timeframe. The reinvestment must occur within one year prior to or two years after the sale of the old property. Alternatively, construction of a new house must be completed within three years from the date of sale.


The Case in Focus: Relief for NRI Couple

In a landmark decision, the ITAT ruled in favor of an NRI couple for the financial year 2010-11. The couple had sold their old property on February 10, 2011. According to the rules, the new property should have been purchased between February 11, 2010, and February 9, 2013, to qualify for the tax exemption. However, the Income-tax Officer (ITO) initially denied the exemption, citing that the purchase agreement for the new house was signed on July 25, 2009, which was outside the stipulated period.


Date of Possession Matters

The pivotal argument in this case was whether the date of the purchase agreement or the date of possession should be considered for tax exemption eligibility. The ITAT ruled that the date of possession is crucial. The NRI couple took possession of the new property on February 2, 2011, which fell within the permissible period. The tribunal clarified that signing an agreement merely grants the right to purchase, not actual possession. Thus, for the purpose of Section 54, the date of possession is decisive.


Implications for NRIs

This ruling is a significant precedent for NRIs investing in under-construction properties. It underscores the importance of the possession date over the purchase agreement date when claiming tax exemptions under Section 54. NRIs should ensure they can substantiate the possession date of their new property to benefit from these tax provisions.

Key Takeaways

  1. Eligibility Period: NRIs must invest in a new house within one year before or two years after the sale of the old house, or complete construction within three years.
  2. Date of Possession: For under-construction properties, the possession date is crucial for claiming tax exemptions.
  3. Proper Documentation: Maintain clear records of the possession date to support your tax exemption claims.

This ITAT ruling provides much-needed clarity and relief for NRIs, making it easier to navigate the complexities of tax benefits related to property investments in India.