What are the tax implications for transferring a plot and handing over Possession without a sale deed?

The income tax act and its provisions suggest that any gains or profits from capital asset transfers in a financial year will be charged to that financial year's income tax, subject to some exceptions.

Lets us look at an example to understand the income tax rule in the case of no sale deed. Let's say that you purchased land in 1996. You decided to sell it and received consideration for the sale in January 2023. You hand over the Possession of the plot to the buyer in January 2023, and the buyer commences construction. However, the sale deed is absent as it was never executed. Will it be treated as an FY 2022-23 sale under IT Act for capital gains purposes? Or, will there be a capital gains tax liability upon the sale deed registration and execution in FY 2023-24? 

Also Read: How is a sale agreement different from a sale deed? 

What Does The Law Say?

The income tax act and its provisions suggest that any gains or profits from capital asset transfers in a financial year will be charged to that financial year's income tax, subject to some exceptions. Interestingly, the handing over of the immovable property's Possession to the transferee will be treated as a transfer in case of a contract's part performance as per Income Tax Act Section 2(47). The transfer has occurred since you gave the plot's Possession under the sale agreement to the buyer. Income tax laws see this as a transfer. Hence, you would have to pay tax even though there is no sale deed in FY 2022-23. However, as it will be taxed once, it will no longer be required to be taxed again in the year when the sale deed will be registered and executed. 

When you hold the plot for over 24 months prior to a transfer, the sale's profits will be counted as long-term capital gains. You must pay a flat tax of 20% on such long-term capital gains on indexed gains. You can also claim an exemption under Section 54 EC or Section 54F. 

Section 54F suggests that you must invest the consideration for construction or purchasing a residential house. You can purchase one or two years after the sale's date. The house's construction must occur within three years of the plot's transfer. The remaining amount (if any) that is unutilized before the income tax return filing's due date must be deposited in the specified banks' capital gains account. You can use the deposited amount for constructing or buying the house within a specified time. 

Also Read: Everything you need to know about a gift deed. 

You can also claim an exemption by investing the long-term capital gains in specified entities' capital gains bonds. These are the IRFC, PFC, NHAI, and REC within six months from the transfer date. The period begins when you hand over the plot's Possession to the buyer, and you can only invest up to Rs. Fifty lacs to preserve long-term capital gains.  

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.