“TAX IMPLICATIONS FOR LANDOWNERS IN JOINT DEVELOPMENT AGREEMENTS”

Why in the news?

Recent updates highlight the complexities of tax obligations, including capital gains, TDS, and GST, for landowners engaged in joint development agreements with builders.

TAX IMPLICATIONS FOR LANDOWNERS IN JOINT DEVELOPMENT AGREEMENTS - UPSCsource:wilimedia

Capital Gains Taxation:

  • Joint Development Agreements (JDAs) involve landowners exchanging land for constructed units or additional compensation.
  • Tax implications under JDAs can be complex, with capital gains tax liability arising when the project receives a completion certificate, as per Section 45(5A) of the Income Tax Act, 1961.
  • For example, if Mr. A, who bought a house in 1998 for ₹20 lakh, enters a JDA in 2021 and the project completes in 2024, his capital gains would be calculated based on the fair market value as of 2001 and indexed accordingly.
  • A’s total consideration would be ₹3.20 crore, leading to a capital gains tax liability of ₹27.70 lakh at a 20% tax rate, excluding surcharge and cess.

Tax Deduction at Source (TDS):

  • TDS at 10% under Section 194-IC applies to the ₹20 lakh advance payment received by Mr. A, which can be carried forward in annual income tax returns until the capital gain is taxed.
  • Hardship money received by Mr. A during construction is classified as a capital receipt and is not taxable under Section 45(5A), nor is TDS deducted on this amount.
About Section 45(5A) of The Income Tax Act, 1961: Key Points

  • Capital Gains Tax: Capital gains from the transfer of land/building under a specified agreement are taxed in the year the completion certificate is issued by the competent authority.
  • Full Value Consideration: Includes the stamp duty value on the certificate date plus any cash received.
  • Pre-Certificate Transfer: If the share is transferred before the completion certificate, capital gains are taxed in that year.
  • Competent Authority: The authority that approves the building plan.
  • Specified Agreement: A registered agreement allowing another person to develop a real estate project.
  • Stamp Duty Value: Value assessed for stamp duty payment.

Pursuant to a Joint Development Agreement (JDA):

  • Execution: A JDA is signed between a landowner and a developer/builder, or in urban areas, members of a Cooperative Housing Society enter into a redevelopment agreement with a builder.
  • Development: The landowner provides land to the developer, who undertakes construction and related work.
  • Allotment: Upon completion, the developer allots a specified number of units to the landowner or provides a percentage share of the sale proceeds.

Taxation:

  • Developer: Income from unit sales is taxable under ‘Profits and Gains of Business or Profession’.
  • Landowner: Generally taxed under ‘Capital Gains’ for lump-sum amounts, units, or sale proceeds.