When a residential building goes through redevelopment, existing flat owners often receive a new and larger flat in place of their old one.
But it can trigger important tax questions when the redeveloped property is later sold. From which date should the holding period of the property be counted for determining whether the capital gain is long-term or short-term?
A recent ruling by the Mumbai Income Tax Appellate Tribunal (ITAT) has provided clarity on this issue.
The ruling is particularly relevant for flat owners whose properties have undergone redevelopment and who later sell their new flats.
It highlights why the date on which enforceable rights in a property arise can be more important than the date on which the final accommodation agreement or possession is completed.
STORIES YOU MAY LIKE
ALSO READ
The case
In Rajesh Shamji Furia v. ITO [ITA No. 1672/Mum/2026, AY 2018-19], the Mumbai ITAT considered the manner of computing the holding period of a residential flat allotted following redevelopment of an old building.
The core issue involved whether the residential flat received by the taxpayer following the redevelopment would be considered as a completely new property or it represented a continuation of his pre-existing rights in the original property. Such determination became crucial for the purpose of classifying gains on subsequent sale of such flat as long-term or short-term capital gain.
The taxpayer, along with his wife, had jointly purchased a 510 sq. ft. residential flat in FY 2006-07 and in 2013, their housing society entered into a redevelopment agreement with a developer.
Under the arrangement, existing members became entitled to a new flat comprising their original carpet area plus 30% additional area without any further consideration. Also, the taxpayer’s new flat included 185 sq. ft. transferred by his mother and another 55 sq. ft. which was purchased from the developer for Rs. 6 lakh.
The parties executed the Permanent Alternate Accommodation Agreement (PAAA) on 12 January 2018, as per which the taxpayer received Flat No. 503, which was sold by him eight days later, on 20 January 2018, for Rs. 1.95 crore.
The taxpayer treated the gains on such sale as long-term in nature and claimed the available exemption under section 54/54F for investment in another residential property. However, the Assessing Officer (AO) treated the redeveloped flat as a new and separate asset acquired only on 12 January 2018.
Since the taxpayer sold it just eight days later, the AO treated the gain as short-term capital gain, denied indexation benefit and the section 54/54F exemption, and made an addition of Rs. 80.14 lakh representing the taxpayer’s 50% share of the gain. The CIT(A) agreed with the AO.
The ITAT disagreed with the AO’s approach and held that redevelopment does not ordinarily end the owner’s existing property rights and create entirely new ownership when the redeveloped flat is handed over.
Instead, the owner’s rights continue through the redevelopment process, with the new premises replacing the old premises. Therefore, the PAAA recorded and identified the replacement flat and it did not create the taxpayer’s ownership rights for the first time.
The Tribunal observed that the taxpayer had acquired the original property in 2006. Also, the Development Agreement dated 15 February 2013 clearly provided him an enforceable right to receive the redeveloped flat.
Thus, even if the holding period was to be counted from 2013 rather than 2006, the taxpayer held the relevant property rights for almost five years before selling such flat in January 2018. Accordingly, the property qualified as a long-term capital asset.
The ITAT also rejected the AO’s contention to treat the different portions of the redeveloped flat as separate assets. Although the taxpayer received some additional area that came free of cost under the redevelopment, some came from the taxpayer’s mother and another 55 sq. ft. was purchased from the developer, the ITAT considered these portions as forming part of the existing redevelopment arrangement rather than as creating an entirely new asset on 12 January 2018.
The Tribunal also relied on the Bombay High Court’s ruling in PCIT v. Vembu Vaidyanathan, which treated the date of allotment as the date of acquisition when the allotment created enforceable rights in the property.
It also relied on the Mumbai ITAT’s decision in Urmila Jagdish Mehta v. ACIT, where the Tribunal treated a redeveloped flat as a continuation of the rights attached to the original property.
Thus, the ITAT treated the gains on subsequent sale of the flat as long-term capital gain, deleted the addition of Rs. 80.14 lakh and directed the Assessing Officer to allow indexation and the eligible exemption under section 54 or section 54F.
ALSO READ
Man with Rs 41.45 lakh in bank deposits faces Income Tax action; here’s what ITAT said
Capital gains on redeveloped property: What taxpayers should know
Reference to the above ITAT ruling, where it has been held by the ITAT that a redeveloped flat should not automatically be broken into separate capital assets merely because it contains different categories of area. In the said case, the flat comprised the original area, free additional area, area purchased from the developer and area transferred by the assessee’s mother.
The Tribunal expressly held that these components emanated from pre-existing redevelopment rights and could not be dissected into separate capital assets merely because the PAAA agreement was executed later. The redeveloped flat was treated as a continuation/substitution of the existing capital asset.
“In the said ruling, since the ITAT was dealing with a case relating to AY 2018-19 (or FY 2017 – 18), it did not examine provisions of section 45(5A) of the Income Tax Act, 1961 [corresponding Section 67(14) of Income Tax Act, 2025], which was introduced prospectively with effect from 1 April 2018,” said Amit Ganatra, Partner at Khaitan & Co.
“The said section deals with the chargeability of capital gains tax in case of individual / HUFs from transfer of land / building under a development agreement. Hence, some of the conclusions drawn in the aforesaid decision may not apply to those transactions which have been entered into on or after 1 April 2018,” added Ganatra.
For transactions on or after 1 April 2018, provisions of section 45(5A) / 67(14) would apply subject to fulfilment of conditions mentioned in the said sections.
That does not, however, mean that the cost computation can ignore the different sources.
“A defensible approach is to maintain a component-wise cost ledger and aggregate it into the cost of the single flat: the original property’s permissible cost; actual consideration paid for additional purchased area; and, for genuinely gifted area, the previous owner’s statutory cost under section73 of Income Tax Act, 2025/section 49 of Income Tax Act, 1961,” stated Ganatra.
Free redevelopment area ordinarily carries no separate cash purchase cost merely because extra square footage was received; it forms part of the consideration/substitution arising from the redevelopment arrangement.
“Having said that, any capital gains arising on such transfer under section 45(5A) / 67(14) may be claimed as exempt under section 54 of Income Tax Act, 1961 / section 82 of Income Tax Act 2025 if it is a long term capital asset, being a residential house,” said Ganatra.
Redeveloped property: How to calculate cost and capital gains
The Mumbai ITAT ruling in the case of Rajesh Shamji Furia v. ITO, 16 July 2026 has held that receipt of a replacement flat without paying additional money does not make its tax cost Nil, nor does possession of the new flat necessarily start a fresh holding period. The homeowner has surrendered or substituted existing proprietary/redevelopment rights for the replacement premises.
However post 1 April 2018, section 45(5A) considers a transaction of exchange of flats under joint development agreement as a transaction subject to capital gains tax where the old flat is replaced with a new flat by the developer under the development agreement.
The said section has a bearing on what would be treated as a consideration for transfer under the joint development agreement and has no bearing on how the cost of acquisition has to be determined.
“If provisions of section 45(5A) / 67(14) apply and the transfer of the old flat against allotment of new flat is considered as having taken place on the date of signing the development agreement, any transfer of such new flats received pursuant to signing of development agreement on or after 23 July 2024 may not be eligible to indexation benefits,” as per Ganatra.
“If the transfer of the old flat has been subjected to tax under section 45(5A) / 67(14), then the full value of consideration for transfer of such old flat would have been taken as stamp duty value of the new flat as on date of issuance of completion certificate by the competent authority,” commented Ganatra.
This then will become the cost of acquisition of the new flat and the capital gains have to be computed accordingly.
ALSO READ
Selling a redeveloped flat? Know Section 54/54F tax benefits
Where the asset sold is itself a long-term residential house, the normal exemption is Section 54 of the 1961 Act / Section 82 of the 2025 Act, not Section 54F.
For Section 54/current s.82, an individual or HUF must invest the eligible long-term capital gain in a residential house in India within the statutory purchase (1 year before / 2 years after) or construction (3 years after) window.
Unutilised qualifying amounts must be deposited under the prescribed capital-gains deposit mechanism within the statutory return-filing framework. However, the taxpayer must consider that exemption under section 54 is capped at Rs 10 crores, if the cost of new asset exceeds the said amount.
Redeveloped flat sale: When does LTCG treatment apply?
The ruling may provide relief to homeowners who sell a redeveloped flat soon after receiving possession. Accordingly, a sale within 24 months of possession will not automatically result in short-term capital gains. The relevant question is when the homeowner first acquired clear and enforceable rights in the redeveloped property.
“If the development agreement, allotment letter or other redevelopment documents created those rights more than 24 months before the sale, the homeowner may claim long-term capital gains treatment. The earlier ownership of the original flat may also support the claim because the redeveloped flat generally replaces the old flat and continues the homeowner’s existing property rights,” explained CA (Dr.) Suresh Surana.
However, homeowners cannot apply this ruling automatically in every case. If in any case the allotment or final agreement creates the property rights for the first time and the owner sells the flat within 24 months, the gain may still qualify as short-term.
Redevelopment cases: Which date decides your holding period?
As aforementioned, the date of possession or registration does not decide the nature of the gain on its own.
“The date for determination of holding period would depend on the point at which the taxpayer acquired clear and enforceable rights in the property. If that right existed for more than 24 months before the sale, they may claim long-term capital gains treatment and the related tax benefits, subject to the applicable conditions,” stated Surana.
In order to support their claim, taxpayers may retain documents such as the original purchase agreement, development agreement, society records, allotment letter and PAAA, correspondence with the society and developer etc.
Disclaimer: This article is based on the Mumbai ITAT order in Rajesh Shamji Furia v. ITO [ITA No. 1672/Mum/2026, AY 2018-19]. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
Read Next
aniltikotekar4sme.com 