Selling an under-construction property, especially one with an existing home loan, involves specific financial and tax considerations that sellers should be aware of. The legal interpretation of such a transaction is key: it’s typically viewed as a “transfer of rights” rather than a direct sale of the property itself, as possession has not yet been granted.
Here’s what you need to know:
Managing Your Home Loan When Selling
There are two primary methods for handling the existing home loan:
- Loan Takeover by the New Buyer: The prospective buyer can apply to assume your current home loan. The bank will assess their creditworthiness, and if approved, the loan will be transferred into the buyer’s name. This can help save on processing fees and simplify the transaction. After the transfer, ensure you obtain a No Objection Certificate (NOC) from the bank, which is essential for property registration.
- Buyer Pays Seller to Clear the Loan: The buyer can pay the agreed-upon purchase price directly to you. You would then use these funds to prepay your outstanding home loan and secure a NOC from the bank. Once the loan liability is cleared, you can legally transfer your rights to the new buyer.
Understanding the Tax Implications
Since possession has not been taken, the transaction is treated as a transfer of rights to acquire the property, not the sale of a completed asset. The tax treatment of capital gains depends on the holding period, calculated from the date of allotment by the builder:
- Short-Term Capital Gain (STCG): If you’ve held the rights for less than 24 months, any gain is taxed at your individual income tax slab rate.
- Long-Term Capital Gain (LTCG): If the holding period exceeds 24 months, the gain is taxed at 20% with the benefit of indexation. In certain situations where indexation is not applied, the rate might be 12.5%.
Additional Important Points to Note
Beyond loan management and capital gains tax, consider these crucial aspects:
- Cost of Acquisition: For tax calculations, only the principal amount you’ve paid towards the property (excluding the interest portion of your EMIs) is considered the cost of acquisition.
- Non-Applicability of Tax Exemptions: As the asset being transferred is a “right” and not a physical property, tax exemptions available under Section 54 (reinvestment in a new residential house), Section 54EC (investment in specified bonds), or Section 54F (reinvestment of capital gains from other assets into a residential house) do not apply.
- Builder Consent and Transfer Charges: Always review your builder-buyer agreement thoroughly. Some agreements may restrict or prohibit transfers before possession, or they might impose specific transfer fees. Obtaining the builder’s consent for the transfer of rights will likely be a necessary step.