Joint Development Agreement is a popular arrangement between landowners and builders. In this article, you will learn about the taxability of such a transaction which is slightly different from the usual capital gains transaction.
JDA is a type of agreement between a landowner and a builder. The land owner gives his land to the builder without transferring the ownership. The builder will build apartments or flats on that land and takes care of everything like marketing the property, getting legal permission, and registering the flats in the buyer’s name.
Once the flats are built, the land owner will get a certain number of flats as agreed upon or a share of the money earned by selling the flats. This is merely like a barter arrangement.
This arrangement is good for both the landowner and the builder because the landowner 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. This helps in value creation for both parties.
Taxability Of Income Arising From JDAs In India
1. Taxability in the hands of the owner of the property
Capital Gains taxation consists of 3 aspects i.e. full value of consideration, cost of acquisition, and the year for determination of taxability
- 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.
- Cost of Acquisition
Cost of acquisition = Purchase Price of the land. If the land is held for more than 2 years, the cost must be indexed up to the year in which the land is transferred to the developer (this is done to account for the inflation over the years)
- Year of transfer
The year of transfer is the year in which land is transferred under JDA.
- 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 are known as capital gains. As per the 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, this provision shall not apply if such property is transferred by the owner before such completion certificate is issued.
Computation of Capital Gains tax under Section 45(5A):
| Full Value of Consideration | Stamp Duty Value of the property received + cash payment received |
| Purchase Price of land (COA) x Cost Inflation Index of the year of transfer ÷ Cost Inflation Index of the first year in which land was held by you or for the year 2001-02, whichever is later* | Purchase Price of land (COA) x Cost Inflation Index of the year of transfer ÷ Cost Inflation Index of the first year in which land was held by the you or for the year 2001-02, whichever is later* |
| Capital Gains | xxxx |
*If the asset is acquired before April 1, 2001, the cost of acquisition shall be the actual cost or FMV as on April 1, 2001, whichever is higher.
Eligibility for exemption under Section 54 to 54F
Where the owner buys a part of the property after the redevelopment of such property and makes a payment for the same, he can claim an exemption under Sections 54 to 54F depending on the nature of such property.
Section 45(5A) Of The Income Tax Act: Example
Mr. A purchased a plot of land on December 11, 1997, for Rs. 5,00,000. The fair market value as on April 1, 2001, is Rs. 10,00,000.
On August 19, 2018, he entered into a JDA with Z Builders subject to the following terms and conditions
- Mr. A is to receive 2 flats in the developed project along with a cheque of Rs. 40,00,000.
- Mr. A will hand over the possession of the plot to Z Builders on August 19, 2018. The stamp duty value of each flat on that day is Rs. 30,00,000
The certificate of completion for the said project was issued on January 5, 2023, and on that date, the stamp duty value of each flat is Rs. 50,00,000. The builder transferred the flats to the landowners on March 10, 2021.
The above example can be illustrated by the following timeline:
Computation Of Capital Gain
| Sl. No. | Particulars | Calculations | Amount (in Rs.) |
| (i) | Less: Indexed COA | (50,00,000 x 2) + 40,00,000 | 1,40,00,000 |
| (ii) | Long-Term Capital Gain as on 5 Jan 2023 | 30,00,000 x 280 (CII for 2018-19)100 (CII for 2001-02) | 84,00,000 |
| (iii) | Long Term Capital Gain as on 5 Jan 2023 | 56,00,000 |
Key points to note
- Section 45(5A) applies where the JDA is registered
- The property should be held as capital assets in the books of the owner and not as stock-in-trade of the business
- The owner shall be an individual or HUF
- The property should not be transferred by the owner before the completion certificate is received
- This benefit cannot be availed in case the entire sale consideration is received as cash/in monetary terms instead of a share in such property
Taxability of capital gains when the land owner transfers the flats in a JDA: At a Glance
2. 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.
Liability to deduct TDS on payment made under Joint Development Agreement (Section 194-IC)
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 in 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 @20%.
FAQs
When does the tax liability arise in the case of JDAs?
Under JDA, the capital gain tax liability arises in the year in which you receive the Certificate of Completion and not in the year in which you transfer the land.
Can the owner claim the benefit of JDA if the entire consideration is received in cash?
No, JDA is applicable only where the part or full consideration is received in the form of a share in the property.
The definition of ‘specified agreement’ in Sec 45(5A) provides for only following consideration:
- Consideration in the form of share in project + cash consideration.
- Consideration only in the form of a share in the project without any cash consideration.
Hence, if the land owner is to receive only cash consideration, then it is not a ‘specified agreement’ & hence Sec. 45(5A) will not apply.
Is GST applicable to Joint Development Agreement?
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 issuing the Completion Certificate (CC).
What if the 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 cases and normal provisions of the Income Tax Act shall be applicable.
Why was 45(5A), a specific provision for the taxability of JDA, introduced?
As per the basic premise of capital gains tax, the tax liability arises in the year in which the asset (land) is transferred i.e. the year in which the property is handed over to the recipient, however, this caused a challenging situation for the owners as they were expected to pay the capital gains tax in the year in which JDA was entered into which was heavy on their pockets. The owners had to pay taxes even though they had not yet received payment from the developer.
Additionally, the income tax department would use Section 50D of the Income Tax Act, which considered the fair market value on the date of land transfer as the full value of consideration, ignoring the fact that real estate projects often take a long time to complete. Therefore, Section 45(5A) was introduced by the Finance Act of 2017 to address this issue.