INCOME TAX ON JOINT DEVELOPMENT AGREEMENT IN INDIA

Saturday Brain Storming Thought (241) 21/09/2024

INCOME TAX ON JOINT DEVELOPMENT AGREEMENT IN INDIA

Joint Development Agreement is a popular arrangement between landowners and builders

Joint Development Agreement (JDA)

A Joint Development Agreement (JDA) is a legal contract between the land owner and a real estate developer that outlines their collaboration on a property development project

In a JDA, the land owner provides the land, and developer constructs and develops the property

In JDA, the land owner doesn’t have to spend any money on construction and the builder doesn’t have to spend money on buying land, which can be used for construction instead

Taxability in the hands of the owner of the property

Capital Gains Taxation consists of 3 aspects

1) Full Value of Consideration (FVC)

FVC = Stamp duty value of the property you received as on the date of issue of Completion Certificate + Cash received, if any

2) Cost of Acquisition

Cost of Acquisition = Purchase price of land

If the land is held for more than 2 years, the cost must be indexed up to the year in which land is transferred to the developer (this is done to account for the inflation over the years)

3) Year of transfer

The year of transfer is the year in which land is transferred under JDA

4) Year of taxability i.e. the year in which the owner has to pay tax

The gains you make by receiving flats in exchange for land is known as capital gains

As per provisions of section 45(5A), you will have to pay tax on these capital gains in the year in which the certificate of completion is issued for the whole or part of the property

This means you will have to pay tax in the year in which the building project is completed

However, if the assessee transfers his share in such a project before the completion certificate is issued then he will have to pay taxes in the year in which such transfer took place

Computation of Capital Gains Tax under Section 45(5A)

Capital Gains = (Full Value Consideration) – (Indexed Cost of Acquisition)

If the asset is acquired before 01/04/2001, the cost of acquisition shall be the actual cost of Fair Market Value as on 01/04/2001, whichever is higher

Section 45(5A) of the Income Tax Act Example

Data assumed

1) Purchase price on 11/12/1997 is Rs 5 Lakh

2) Fair Market Value as of 01/04/2001 is Rs 10 Lakh

3) On 19/08/2018, the owner entered into a JDA on the following terms and conditions

a) The owner will receive 2 flats in a developed project with a Rs 40 Lakh cheque

b) The owner handed over possession of the plot to the builder on 19/08/2018

c) Stamp duty value of each flat on that day is Rs 30 Lakh

d) The Completion Certificate date of the said project is 05/01/2023

e) Stamp duty value of each flat on 05/01/2023 is Rs 50 Lakh

f) Builder transferred the flats to landowners on 10/03/2023

Computation of Capital Gain

1) Full Value Consideration of 2 flats as of 05/01/2023 + Cash

= (Rs 50 Lakh X 2) + Rs 40 Lakh = Rs 140 Lakh

2) Indexed Cost of Acquisition

= Rs 10 Lakh X (280/100)

Cost Index for year 2018-19 is 280

Cost Index for year 2001-02 is 100 = Rs 28 Lakh

3) Long Term Capital Gain

= (Full Value Consideration) – (Indexed Cost of Acquisition)

= Rs 140 Lakh – Rs 28 Lakh = Rs 112 Lakh

Key Points to Note

1) Section 45(5A) applies where the JDA is registered

2) The property should be held as capital assets in the books of the owner and not as stock-in-trade of business

3) The owner shall be an individual or HUF

4) The property should not be transferred by the owner before the completion certificate is received

5) The benefit cannot be availed in case the entire sale consideration is received as Cash / in monetary terms instead of a share of such property

Taxability of Capital Gains when the land owner transfers the flats in a JDA: at a glance

1) The land owner entered into a JDA with the government

2) The owner received his share in that project in exchange for the land

3) Is the land owner transferring his share in the project after the date of issue of the Completion Certificate

If Yes

Capital Gains Tax = In the year in which the completion certificate is issued

If No

Capital Gains Tax = In the year of land transfer

Taxability in the hands of the Developer of the property

For the builder / Developer, such property built by them will be considered stock-in-trade

Therefore, the nature of income from the sale of such property shall be income from business and profession

The income will include proceeds from the sale of such property and he shall be allowed to deduct the business expenses incurred on the development of such property

The balance will be taxable

Section 194-IC-TDS on payment made under JDA

Under JDA, where the real estate developer pays any monetary consideration in the form of cash or any other mode in addition to the share of the project, then the developer shall be liable to deduct TDS @ 10% on such payment

However, if the PAN of the owner is not available, then such TDS shall be done at 20%

When does the tax liability arise in the case of JDA

Under JDA, the Capital Gain Tax liability arises in the year in which you receive the completion certificate and not in the year in which you transfer the land

Can the owner claim the benefit of JDA if the entire consideration was received in cash

JDA is applicable only where the part or full consideration is received in the form of a share in the property

Hence, if the land owner is to receive only cash consideration, then it is not a specified agreement, and hence Section 45 (5A) will not apply

Applicability of GST on JDA

Yes

GST is applicable in the case of JDA

However, the liability to pay tax shall be borne by the developer/builder under the reverse charge mechanism (RCM) instead of the owner of the land

After a recent amendment, the developer must pay GST before or at the time of the issuing of Completion Certificate (CC)

If JDA is not registered

In case the JDA is not registered, it shall not be considered a transfer and Section 45 (5A) shall not apply in such case and normal provisions of the Income Tax Act shall be applicable

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