Section 45(5A) Of Income Tax Act - Joint Development Agreement

Joint Development Agreement is a popular arrangement between the land-owners 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.

Under JDA, a land owner enters into an arrangement with a builder to swap his land for flats. The owner offers his land without transferring the ownership and in return the builder undertakes to redevelop the property at his own expense like: marketing the property, obtaining legal approvals, registering the property in the name of the buyer, etc. 

Once the building comes up, the developer allots a specified number of units(flats) to the landowner as per the mutually agreed share or the landowner may receive a percentage share of consideration received from sale of the units.

It saves capital for both parties as the land owner need not spend any amount on the construction and the builder need not invest any money to buy land, which can instead be used in construction. This helps in value creation for both parties.

Taxability Of Income Arising From JDAs In India 

1. Taxability in the hands of 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

Computation of Capital Gains tax   

*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.

1. Full Value of Consideration 

FVC shall be the stamp duty value of his share in the developed property as on the date of issue of Completion Certificate plus cash consideration received, if any.

2. Cost of Acquisition

Cost of acquisition shall be the price at which such property was acquired by the owner. 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. 

3. Year of transfer

Year of transfer is the year in which land is transferred under JDA. 

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

As per the provisions of Section 45(5A), the taxability of JDA arises in the year in which the certificate of completion is issued for the whole or part of the property.

However, this provision shall not apply if such property is transferred by the owner before such completion certificate is issued. 

5. Eligibility for exemption under Section 54 to 54F

Where the owner buys a part of property after the redevelopment of such property and makes a payment for the same, he shall be entitled to claim exemption under Section 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 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. 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.

Above example can be illustrated by following timeline: 

Computation Of Capital Gain 

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 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 share in such property

Taxability of capital gains when land owner transfers the flats in a JDA: At a Glance

2. Taxability In The Hands Of Developer Of The Property 

For the builder/developer, such property built by them will be considered as 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 sale of such property and he shall be allowed to deduct the business expenses incurred on 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 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 case of JDAs?

Under JDA, the capital gain tax liability arises in the year in which you receive Certificate of Completion and not in the year in which you transfer the land.

Can the owner claim 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 share in project without any cash consideration.

Hence, if 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 on Joint Development Agreement?

Yes, GST is applicable in case of JDA. However, the liability to pay tax shall be borne by the developer/builder under reverse charge mechanism (RCM) instead of the owner of the land. After a recent amendment, 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 as ‘transfer’ and Section 45(5A) shall not apply in such case and normal provisions of 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.