ITAT Rules 'Jodi Flats' Can Qualify as Single Residential Unit for Capital Gains Tax Exemption

The Income Tax Appellate Tribunal (ITAT) has ruled that adjacent flats purchased together—either side-by-side or one above the other—with a common entrance and treated as a single residential unit can be considered as one house for capital gains investment. However, this eligibility is subject to physical verification by the Income Tax Department.

In a recent ruling, the Mumbai bench of the ITAT stated that the Jurisdictional Assessment Officer (JAO) cannot deny a claim merely because there are two registered conveyance deeds, separate flat numbers, distinct parking spaces, or an absence of separate municipal or RERA amalgamation approval. The tribunal noted that these circumstances by themselves are not determinative of the issue under Section 54F of the Income-tax Act.

The tax benefit will depend strictly on the results of physical verification to establish that the two flats are physically interconnected and constitute a composite residential house. The tribunal outlined specific conditions for this verification process. First, the assessment must determine whether the two flats are physically interconnected and function as a single residential dwelling. Second, it must verify whether the accommodation shares a common passage or internal access and a common kitchen, and is used for a single residential purpose.

Third, authorities must check if the actual physical configuration substantially corresponds with the photographs, architect’s material, society letter, previous-owner confirmation, and other evidence produced by the Assessee. Fourth, the verification will assess whether the two portions are maintained and used as one residential house rather than as two separate and independent dwellings.

Under the Income Tax Act, taxpayers can claim tax exemption from long-term capital gains (LTCG) earned through the sale of non-residential assets such as shares, gold, or land, or from residential assets, provided the investment in another residential property is made within a prescribed time limit. Section 54F of the Income-tax Act offers LTCG tax exemption if net proceeds are reinvested into one residential house purchased within one year before, two years after, or constructed within three years of the transfer.

Following a 2014 amendment to the Income Tax Act, the exemption is strictly limited to one residential house in India. This created ongoing questions regarding the definition of a single residential house, specifically whether it includes a combination of two or more flats joined by a common entrance. The recent judgment addressed this basic criteria for deciding whether a combined property qualifies as one residential house.

In reaching its decision, the bench drew precedent from the case DCIT v. Priyanka Bhaskar Shah, where a claim under Section 54F was allowed subject to physical verification of the flats as a matter of abundant caution. The ITAT concluded that the tax department failed to demonstrate any legal or factual basis warranting the withdrawal of relief, reinforcing that separate documentation alone does not automatically invalidate a taxpayer's claim for exemption.

"This ruling provides much-needed clarity for individuals looking to invest capital gains into combined residential units, commonly known as Jodi flats. While separate conveyance deeds or parking spaces will no longer be immediate grounds for rejection, taxpayers must ensure their properties are genuinely interconnected and function as a single residential unit. Real estate buyers and founders managing personal wealth should maintain thorough photographic, architectural, and documentary evidence to successfully clear the mandatory physical verification by the tax department." — Dr. Shishir Gupta, Founder & CEO, StartupLanes