The flat the builder 'gave' you is taxable income — this year

You design the apartment project. The builder pays part of your professional fee in cash. For the final ₹35 lakh, there is a handshake:

“Take Flat 302. We will adjust it against your balance fee.”

No money enters your bank account. No conventional receipt is issued. The flat may not be registered immediately. Everyone treats it as a convenient exchange that can be dealt with “when the flat is sold.”

That is precisely where the tax problem begins.

The builder did not give you a tax-free flat. You earned professional income and collected the consideration in property instead of money.

The ₹35 lakh is professional income now

Section 28(iv) of the Income-tax Act taxes the value of any benefit or perquisite arising from business or the exercise of a profession, whether convertible into money or not. The Finance Act, 2023 expanded the wording to make clear that the provision covers benefits received in cash, in kind, or partly in both. (Section 28, Income-tax Act)

A flat allotted in settlement of architectural, design, interior-consultancy or project-consultancy fees is an in-kind professional receipt. Its value must enter the architect’s professional accounts in the year the enforceable right to the flat accrues, based on the agreement, allotment, possession and registration facts.

It is not postponed until:

• the sale deed is registered;
• possession is handed over;
• the project is completed;
• the architect sells the flat; or
• cash is finally realised.

The relevant amount should ordinarily be supported by the flat’s agreed value, open-market evidence and applicable stamp-duty value. If the stamp-duty value of Flat 302 is ₹35 lakh, quietly recording “nil consideration” or a nominal figure does not eliminate the ₹35 lakh economic receipt.

At this stage, the character is professional income, not capital gains. Capital gains arise only when the architect later transfers the flat.

Worked example: Flat 302 has a stamp value of ₹35 lakh

Assume:

• balance architectural fee settled through the flat: ₹35,00,000;
• stamp-duty value when the right accrues: ₹35,00,000;
• no other discrepancy between agreed and market value;
• figures below exclude surcharge and use 4% health and education cess;
• the architect’s other income already places the incremental income in the 30% slab.

If regular books are maintained

The architect records:

If there is no additional deductible expenditure attributable to this ₹35 lakh receipt, the illustrative incremental tax at a 30% marginal rate is:

• Income-tax: ₹35,00,000 × 30% = ₹10,50,000
• Cess at 4%: ₹42,000
• Total illustrative tax: ₹10,92,000

Actual tax depends on the architect’s total income, deductions, chosen tax regime, surcharge exposure and properly recorded professional expenses.

The critical point is cash flow: the architect may owe nearly ₹11 lakh of incremental income-tax despite receiving no cash from the builder.

Can section 44ADA reduce the taxable amount to 50%?

Potentially, yes—but it does not make the flat disappear.

Section 44ADA applies to eligible resident individuals and partnership firms other than LLPs carrying on specified professions, including architectural, engineering, technical-consultancy and interior-decoration professions. It ordinarily deems 50% of total gross professional receipts to be taxable profit. The gross-receipts ceiling is ₹50 lakh, increased to ₹75 lakh where cash receipts do not exceed 5% of total receipts. (Section 44ADA, Income-tax Act)

“In kind” does not mean “outside gross receipts.” The ₹35 lakh value of Flat 302 forms part of total gross professional receipts.

If the architect’s only professional receipt for the year is this flat:

Using the same simplified assumption that the incremental amount falls in the 30% slab:

• Income-tax: ₹17,50,000 × 30% = ₹5,25,000
• Cess at 4%: ₹21,000
• Total illustrative tax: ₹5,46,000

But section 44ADA is available only if all eligibility conditions are met and total gross receipts—including cash fees, bank receipts and properties received—remain within the applicable ceiling.

If the architect already collected ₹50 lakh through banking channels and then receives a ₹35 lakh flat, total professional receipts become ₹85 lakh. Section 44ADA is unavailable because the aggregate exceeds even the ₹75 lakh enhanced ceiling. Regular books and the applicable tax-audit provisions must then be examined.

The 50% presumption is also not a licence to record the flat at zero. The correct sequence is:

• include ₹35 lakh in gross receipts; and
• apply the 50% presumptive-profit rule, if legally eligible.

Hit one: a 10% section 194R entry may appear in AIS

Section 194R requires a person providing a resident with a business or professional benefit or perquisite to deduct tax at 10% once the aggregate annual value exceeds ₹20,000. It expressly covers benefits that are wholly in kind. The provision has operated since 1 July 2022; the Finance Act, 2023 separately expanded section 28(iv). (Section 194R, Income-tax Act)

On a ₹35 lakh benefit, the TDS amount is ₹3,50,000.

Because the flat contains no cash from which tax can physically be deducted, the builder must, before releasing it, ensure that the required tax has been paid. CBDT’s section 194R guidelines specifically address wholly in-kind and insufficient-cash situations. (CBDT Circular No. 12/2022)

Many builders ignore this step. Others report the transaction months later. The architect may then discover a section 194R line in Form 26AS or AIS relating to a flat that was never shown as professional income.

TDS is only a tax credit. It does not replace the obligation to report the full receipt.

Hit two: GST applies to the barter

The architect supplied a taxable professional service. Receiving a flat instead of money does not convert that service into a gift or an exempt transaction.

Architectural and interior-design consultancy services are ordinarily taxable at 18% GST. Under section 15 of the CGST Act and Rule 27 of the CGST Rules, where consideration is not wholly in money, the value of supply begins with its open-market value. If that is unavailable, the rules move through the prescribed alternative valuation methods. (Section 15, CGST Act; Rule 27 valuation rules)

If ₹35 lakh is the value of the architectural service before GST:

• taxable value: ₹35,00,000;
• GST at 18%: ₹6,30,000;
• invoice value: ₹41,30,000.

The agreement must say whether the flat settles ₹35 lakh plus GST or whether ₹35 lakh is an inclusive value. If ₹35 lakh is GST-inclusive, the taxable value and GST component require reverse calculation.

Either way, GST must be reported and paid through the architect’s GST returns. A flat cannot be deposited into the electronic cash ledger. Unless the agreement provides a cash component for taxes, the architect may have to fund GST personally.

Hit three: the later sale creates capital gains

After acquisition, the flat is normally held as a capital asset, assuming the architect is not treating it as stock-in-trade.

When it is later sold:

Capital gain = sale consideration determined under the Act − cost of acquisition − eligible transfer expenses and other permitted deductions.

The cost position must be tied to the value already recognised and taxed under section 28(iv). If ₹35 lakh was brought to tax as the professional receipt, ₹35 lakh should be documented as the flat’s acquisition cost for the subsequent capital-gains computation. Without the original invoice, allotment records, tax return and valuation trail, the architect may struggle to prevent the same economic value from effectively being taxed twice.

For immovable property, long-term treatment generally requires a holding period exceeding 24 months. The starting date may depend on when enforceable rights arose—such as allotment, agreement or possession—and the transaction documents.

For transfers on or after 23 July 2024, long-term capital gains on land or buildings are generally taxed at 12.5% without indexation. For property acquired before 23 July 2024 and sold by a resident individual or HUF, the law protects the more beneficial outcome by comparing the new 12.5%-without-indexation computation with the former 20%-with-indexation computation. (s.112 as amended by Finance (No.2) Act, 2024)

Proper structure versus the handshake version

A properly documented arrangement normally contains:

• a written professional-services agreement stating the monetary fee;
• a GST tax invoice for the architectural or consultancy service;
• a clear clause identifying the flat or plot accepted towards payment;
• an agreed value reconciled with open-market and stamp-duty values;
• a registered sale or conveyance deed showing the disclosed consideration;
• proper section 194R compliance and TDS credit;
• professional-income recognition in the correct financial year;
• consistent entries in the builder’s and architect’s books; and
• separate provision for GST, income-tax, stamp duty and registration costs.

What commonly happens is the opposite: the fee invoice covers only cash received, the allotment letter calls the flat a “complimentary unit,” GST is ignored, the deed shows an unexplained acquisition, and the architect waits until sale to consider tax.

By then, the registry may already be visible through AIS, SFT information, stamp-registration data or the builder’s TDS filings.

If the acquisition is absent from the books and the architect cannot satisfactorily explain its source, section 69 can expose it as an unexplained investment. Depending on the facts, section 69A may also be examined for unrecorded money or other valuable assets. (Section 69; Section 69A)

FAQs

1. “The flat is not registered yet. Is there still income?”

Yes, if an enforceable benefit or right has already accrued. Registration is strong evidence of transfer, but it is not the only relevant event. The agreement, allotment, adjustment of outstanding fees, possession and unconditional entitlement must be examined under section 28(iv).

2. “Can I report the flat only when I sell it?”

No. Receipt of the flat is professional income under section 28(iv). Its later sale is a separate transfer of a capital asset taxable under the capital-gains provisions. Deferring everything until sale mixes two different taxable events.

3. “If the builder deducted 10% under section 194R, is only the remaining 90% taxable?”

No. The full value of the benefit is included in professional receipts. Section 194R TDS is claimed as tax credit, subject to its appearance in Form 26AS/AIS and reconciliation with the builder’s certificate.

4. “Does section 44ADA automatically protect half the flat’s value from tax?”

Only if the architect and the profession qualify, total gross receipts remain within the applicable ₹50 lakh or ₹75 lakh ceiling, and the presumptive scheme is validly used. The flat’s full in-kind value first enters gross receipts; 50% is then deemed professional income under section 44ADA.

For a transaction-specific income-tax, GST and documentation review, contact Harun Raaj & Associates, Visakhapatnam.

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