Income Tax Tribunal Rules Redeveloped Flat Not Taxable As ‘Income From Other Sources’, What It Means For Homeowners

The case in question involved a flat owner, A. Pitale, who received a new apartment in December 2017 under a redevelopment agreement. The tax authorities had tried to tax the difference of Rs 19.7 lakh between the stamp duty value of the new unit (Rs 25.1 lakh) and the indexed cost of the original flat (Rs 5.4 lakh). However, the tribunal ruled that this was an exchange of property rights, not a transaction resulting in taxable income, according to a report in the Times of India.

The timing of the judgment is notable, as redevelopment activity continues to grow rapidly. As of May 2024, over 31,000 redevelopment projects had been approved in Mumbai alone, according to the Maharashtra Housing Department.

How the Ruling Impacts Taxation

Experts told Outlook Money that this judgment brings about much-needed clarity on the tax treatment of redevelopment transactions. Gaurav Sharma, chartered accountant and CFO of Taxflick.com, a tax portal said the nature of these deals typically does not involve a sale or purchase, but rather a replacement of property.

“In most cases, where the lease of the projects has expired, builders are reconstructing the societies after demolishing the same. In essence, this means there is no sale or purchase of the property, but just getting a new flat against the old one. Keeping the same thing in mind, Section 54 of the Income-tax Act, 1961 states that if any residential property which was held for more than three years and has been redeveloped and the new flat is purchased or acquired, fulfilling any of the following conditions:  within 1 year before, 2 years after the sale, or constructed within three years after the sale, then the capital gain arising on the transfer of the old flat will be exempt to tax to the extent of the cost of such new flat,” says Sharma.

Relief for Owners of Ageing Buildings

Rohan Khatau, director at CCI Projects, said the ruling will be especially beneficial for owners of old buildings where the capital gain from redevelopment is typically low due to indexation benefits.

“For taxation purposes, in particular for many homeowners, especially those in older buildings, the capital gain is often quite low because of indexation benefits or exemptions provided under Section 54 of the Income-tax Act, 1961. This clarification will improve the ease of transactions and will stimulate more societies to commence redevelopment projects without concern of being burdened by taxes based on notional gains,” says Khatau.

Sanjeev Arora, director at 360 Realtors, further elaborated on how homeowners can plan to claim exemptions legally.

“If a flat or property has been given for redevelopment (the property should be at least three years old) and then after the surrender the new property has been acquired within three years after surrender, then in this circumstance, the property owner can get tax exemption under Section 54,” Arora says.

Redevelopment Momentum Expected to Grow

The ruling is expected to drive momentum for redevelopment in other urban centres as well, not just Mumbai. With rising property prices and a growing shortage of affordable space in prime locations, redevelopment is becoming a viable solution for many homeowners.

Says Khatau: “Not just Mumbai, but also other major cities, such as Delhi will see increased focus on redevelopment projects. As property prices are rising, it is becoming unaffordable for many to own a spacious home in a prime location. In such a case, a redevelopment project will be a viable option.

Prasun Kumar, chief marketing officer, Magicbricks, said the ruling could help cities with ageing infrastructure upgrade their housing stock.

“With this precedent, societies in cities with ageing infrastructure, such as Mumbai, Pune, and Delhi, will feel more empowered to explore redevelopment options, paving the way for safer, more modern housing across urban India,” he adds.

Capital Gains Still Apply at the Point of Sale

While the ruling removes the burden of taxation under “Income from Other Sources,” experts caution that capital gains tax may still apply in some cases.

“Though homeowners can stay assured that they won’t face additional tax burdens, such as tax on ‘Income from Other Sources’ simply for participating in the redevelopment project, capital gains tax provisions may still apply (on a case-to-case basis) at the time of registration of the new property,” says Kumar.

He added that this would also streamline compliance and reduce litigation around such projects.

Abhishek Raj, founder and CEO of Jenika Ventures said that the latest decision on capital gains tax (CGT) in redevelopment projects might have some major repercussions for developers and residents.

“If residents are allotted a new property in exchange, they might not incur immediate tax, but when the redeveloped unit is sold in the future, they will have to pay CGT based on its fair market value at the time of possession. For individuals who are paid in money, the sum might be charged to income from other sources or capital gains, depending on the contract. Nevertheless, there are tax relief options under Section 54 (reinvestment in dwelling property) and Section 54EC (investment in particular bonds),” he says.

Tax Planning and the Road Ahead

Raj said that the ruling may lead some societies to reassess their redevelopment plans in the short term. However, the long-term advantages will outweigh any short-term costs.

“In Mumbai and other urban centres, this ruling could slow down some redevelopment projects as societies reassess financial implications. However, given the pressing need for modernised housing and better infrastructure, redevelopment will remain a key strategy. Developers may introduce structured financial solutions to help homeowners navigate tax burdens and maximise benefits. Even though early fears were articulated, this decision is not likely to hinder housing societies from redeveloping. The long-term benefits, like the improved amenities, value addition, and improved safety levels, overcome short-term tax fear. By planning properly, the owners can use tax exemptions to maximize financial returns,” he says.

Raj added that a lot would also depend on whether the government introduces further incentives.

“As Mumbai’s ageing buildings require urgent redevelopment, societies will continue to move forward. If the government introduces further tax incentives or clarifications, redevelopment could gain even stronger momentum, ensuring sustainable urban growth and improved living standards for residents,” he adds.