Understanding long-term capital asset status for allotted land after 10 years

An application was made to the housing board for allotment of a plot of land in 2014, and application money of ₹1 lakh was paid. By 2015, the allotment was confirmed through a lottery, and an allotment letter containing the payment schedule of the balance purchase consideration was issued. I made the balance payment on different successive dates spanning 2023. Upon payment of the last instalment in December 2023, the sale deed was executed in my favour and duly registered. In March 2024, I was given possession of the land through a possession Certificate. In April 2024the land was mutated in my name in the records of Municipality. When shall the land become a Long Term Capital Asset, given the fact that ultimately the possession was given to me about ten years later from the date of the original allotment, and there was no change of hand in between so far as the ownership of the land is concerned? Do I have to wait till the expiry of two years from the date of execution of the sale deed or receipt of possession to be qualified as Long Term Capital Asset? Will I be entitled to indexation of instalments paid on the successive due dates spanning over ten years once the land qualifies for being treated as long-term capital assets?

Since you were allotted a specific plot of land, you became entitled to get the plot of land on issue of the letter of allotment, which was equivalent to owning the plot. This position is supported by CBDT Circular No. 471, dated 15-10-1986, issued in the context of flats allotted under the self-financing scheme of the Delhi Development Authority.

There is also a possibility of the department taking the contrary view that you became the plot owner only on execution of the sale deed and earlier what you had a right to acquire the plot of land, which is different from owning a plot of land. So, if we follow the first line of logic, the plot of land has already become a long-term capital asset, but if you do not wish to take any risk, you will have to wait for two years from the date of the sale agreement for the plot to become long term capital asset.

Understanding Land Allotment and Capital Gains Tax

The indexation benefits, in general, have been removed by the latest budget. Still, an Individual and a HUF who are tax residents can pay tax at a flat rate of 12.50% on unindexed long-term capital gains or at a flat rate of 20% after availing the benefit of indexation. Under the first alternative, you can claim indexation from the date of allotment of the plot of land, treating the balance amount mentioned in the allotment letter as nothing but the money you owe to the housing board.

Please note that if you are planning to avail of an exemption under Section 54EC by investing in capital gains bonds of a specified financial institution, the indexation benefit is not available there, and you will have to invest the unindexed long-term capital gains in these bonds within six months from the date of sale of the plot of land.

If you are planning to avail yourself of tax exemption under Section 54F by investing in a residential house, you will have to invest in net sale consideration to buy or construct the residential house within the prescribed time period. Amount not utilised before the due date of filing of the ITR has to be deposited in a capital gains account to be opened with a scheduled bank. The amount so deposited in the capital gains account has to be utilised to make payment for the purchase or construction of the house.

Read all our personal finance stories here

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on social media platform X (formerly Twitter)

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.