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An Article on Income-Tax Implications for the persons who give their land/House/Ancestral Property to Builders/Developers under Joint Development Agreement and receive flats in the newly constructed building on the same site alongwith cash consideration: Section 45(5A) of the Income-tax Act, 1961.
The fast urbanisation of our country and lack of land in developed area has brought a concept of Joint Development Agreement in cities and towns, wherein the owner of a house or land site enters into agreement with a builder/developer for construction of building/apartment blocks on the said land/house. The landowners/houseowners get some flats in the newly constructed building alongwith cash consideration from the builders/developers in lieu of surrendering the exclusive right on the property. In the case of joint ancestral properties, this arrangement of joint development agreement are helping the families in getting their share in the inherited property in a transparent way. These types of transactions are rapidly happening in Tier 2 and Tier 3 cities alongwith Metros. However, there is no much awareness about how the transaction is taxed into the hands of the owners of the original property. In this article I will discuss this issue in detail with the help of an example. Readers are requested to feel free in asking questions after reading the article.
Legal Provisions- Section 45(5A) of the Income-tax Act, 1961:- If any Individual or HUF has transferred any land or building or both being a capital asset under a Registered Joint Development Agreement, the capital gains shall be chargeable to income-tax as income in the year in which the full or part completion certificate is issued by the Local authorities to the newly constructed project developed under the joint development agreement. The full value of consideration shall be the stamp duty value of the share of the original owner in the project alongwith cash consideration received, if any and the capital gains shall be worked out as per section 48 accordingly.
Now let us understand the entire provisions with the help of an example for easy understanding:-
Mr. A has an ancestral house in Bangalore. A builder approached Mr. A and proposes to construct a multistoried building on the house-site. The builder offered 4 flats of 3BHK in the proposed building alongwith an upfront payment of Rs. 2 Crore in lieu of giving the development rights to the builder. Mr. A accepted the proposal as the house was in a delipidated condition and the family was emotionally attached to the property. So, it was a win-win situation for both Mr. A as well as the builder as Mr. A was getting four flats on the same site with monetary considerations of Rs. 2 Crore and the builder has not to spend much money to acquire land in the developed area. Accordingly, Mr. A received the consideration of Rs. 2 Crore and a Joint Development Agreement was executed between Mr. A and the Builder in the month of October, 2023 (i.e. in F.Y. 2023-24) incorporating all the terms and conditions alongwith description of 4 flats of 3BHK in the proposed multistoried building. The Joint Development Agreement was registered with the Sub-Registrar and Mr. A handed over possession of the ancestral house to the builder in October, 2023 for construction of multistoried building.
In the above backdrop, let us understand the taxation of entire transaction in the hands of Mr. A:-
Although Mr. A has received the cash consideration of Rs. 2 Crore during F.Y. 2023-24, no taxes are payable on the said receipt now. The entire taxation will be done in the year in which the multistoried building will be constructed and the Municipal/Local/Development Authority issues the part of full occupation/completion certificate to the building. Let us assume that the construction of building is completed in F.Y. 2025-26 and the completion certificate is also issued in F.Y. 2025-26. So, Mr. A is supposed to declare the entire transaction and also pay taxes in the F.Y. 2025-26. Here it is pertinent to mention that the builder/developer shall deduct TDS on the payment of cash consideration of Rs. 2 Crore in F.Y. 2023-24 as per applicable rate.
You are aware of the various terms of calculation of Long Term Capital Gains on sale of immovable properties in India, which have been discussed in my previous article, link of which is as under:-
https://taxguru.in/income-tax/long-term-capital-gains-sale-immovable-property-india.html
In the case of joint development agreement, the working of Long-Term Capital Gains will be done as prescribed under the provisions of sections 48 and section 45(5A) of the Income-tax Act, 1961. Let us now proceed towards the calculation of Long-Term Capital Gains in the hands of Mr. A in F.Y. 2025-26:-
Full Value of Consideration:- Here Mr. A has received 4 flats of the composition of 3 BHK along with cash consideration of Rs. 2 Crore in lieu of surrendering the exclusive rights on his ancestral house. So here the full value of consideration shall be the Stamp duty value/Guideline Value/Circle Rate/Ready Reckoner Rate of the 4 flats on the date of receipt of the completion certificate from the municipal/local authority alongwith Rs. 2 Crore. Let us assume that the Stamp duty value/Guideline Value/Circle Rate/Ready Reckoner Rate of each 3BHK flat will be Rs. 1.00 Crore in the F.Y. 2025-26. So the full value of consideration on the transfer executed by joint development agreement shall be as under:-
| Guideline value of 4 flats of 3BHK | 1,00,00,000 X 4= Rs. 4,00,00,000/- |
| Add: Cash consideration received in F.Y. 2023-24 | Rs. 2,00,00,000/- |
| Full Value of consideration | Rs. 6,00,00,000/- |
Cost of acquisition:- Since the property was inherited by Mr. A, it is presumed that the property was purchased/acquired by the original owners before 01.04.2001. In the cases of the immovable property, which was acquired before 01.04.2001 by the original owners, the cost of the property is Fair Market Value (FMV) as on 01.04.2001. The FMV may be obtained from a Registered Government Valuer. Please note that the FMV of the property as on 01.04.2001 shall not exceed the Stamp duty value/Guideline Value/Circle Rate/Ready Reckoner Rate as on 01.04.2001. Let us assume that the FMV of the property as on 01.04.2001 was Rs. 50 Lakh. So the cost of acquisition shall be deemed to be Rs. 50 Lakh.
Indexed cost of acquisition:- In the cases of Joint Development Agreement, the indexation on the cost of acquisition is allowed till the F.Y. in which the agreement was executed and possession of the property is handed over to the developer/builder. Here in the present case the development agreement was executed in the month of October, 2023 and possessions was also handed over immediately after i.e. in F.Y. 2023-24. So the benefit of indexation on the cost of acquisition shall be allowed from the F.Y. 2001-02 to F.Y. 2023-24:-
working of Long-Term Capital Gain in the hands of Mr. A in F.Y. 2025-26
| Full value of Consideration | Rs. 6,00,00,000/-(A) | |
| Cost of Acquisition
as on 01.04.2001 |
Rs. 50,00,000/- | |
| Deemed year of acquisition | F.Y. 2001-02 | |
| CII of 2001-02 | 100 | |
| Indexation allowable till | F.Y. 2023-24 | |
| CII of 2023-24 | 348 | |
| Indexed Cost of acquisition | Rs. 50,00,000 X 348/100 | Rs. 1,74,00,000/-(B) |
| Long Term Capital Gain
(A-B) |
Rs. 4,26,00,000/- | |
| Tax on LTCG @ 20% | Rs. 85,20,000/- |
So, the entire transaction of handing over the ancestral house under a joint development agreement and receiving four 3 BHK flats alongwith cash consideration of Rs. 2 Crore will result in Long Term Capital Gains of Rs. 4.26 Crore in the hands of Mr. A in the F.Y. 2025-26. The total taxes payable will be Rs. 85,20,000/- plus applicable surcharge and cess in F.Y. 2025-26. It is therefore advisable to keep the cash consideration in mind for making provisions of taxes while entering into the joint development agreement.
What if Mr. A wants to sell one of the 3BHK flats received from builder:-
If Mr. A wishes to sell one of the 3BHK flats received from builder, the sale consideration will attract the provisions of capital gains separately from the above transaction. Since Mr. A will receive the flat in F.Y. 2025-26, he has to hold it for a minimum of 24 months from the date of completion certificate issued to the building for getting benefits of the Long-Term Capital Gains. The cost of acquisition will be allowed at 1,00,00,000/- as discussed above and indexation benefits will be allowed accordingly. If Mr. A wishes to sell immediately after taking possession of the new flat or within 24 months of receipt of the new flat, the same will be taxed as Short Term Capital Gain.
To summarise, the pointers are given hereunder for a quick recap:-
- Taxation of Capital Gains on transfer of immovable property under Joint Development Agreement is governed under section 45(5A) read with section 48 of the Income-tax Act, 1961.
- The provisions and benefits are available only for Individuals and HUFs.
- The Joint Development Agreement must be registered with Sub-Registrar, otherwise the benefits will not be available to the owners.
- The benefits of section 45(5A) will not be available if the rights in the newly constructed flats/properties are transferred by the owners before receipt of completion certificate of the new building.
- TDS is applicable on the cash consideration received in the year of receipt of cash consideration.
- The entire transactions are to be declared in the year in which the completion certificate is received in respect of the newly constructed building.
- Full value of consideration shall be the stamp duty value/guideline value of the new properties received as on the date of completion certificate plus the cash consideration received.
- Cost of acquisition of the old property will be the cost paid by the owners or FMV as on 01.04.2001(in the case of property acquired before 01.04.2001).
- Indexation on the cost of acquisition will be restricted till the F.Y. in which the possession of the old property was handed over to the builder/developer.
- In the case of jointly held property, the cost of acquisition will be divided in the ratio of the share in the original property vis-à-vis property and consideration received by each owner separately.
- In case of sale of the flats/properties received under joint development agreement, the working of capital gains will be done separately, wherein the guideline value/stamp duty valuation of the property as on completion certificate will be allowed as cost of the acquisition.
All aspects of the transfer of immovable property under a Joint Development Agreement have been covered in the article. Readers are encouraged to ask any questions they may have, and I will promptly respond. Feel free to write your questions in the comment box or contact the author directly via WhatsApp at +91 9967745680 or through email at bdconsultantsindia@gmail.com for professional consultation on Income-Tax provisions related to property transactions.
Author Bio
Suppose a land is given on BOT (Build-Operate-Transfer) for 11 years. The transferee builds a factory shed (costing Rs. 1 crore) in one year and gives it out on rent. It enjoys rental income for 10 years and then the transferor gets back the land along with the factory shed.
What would be the taxability of the transferor and when?
There are two issues needed your consultation.
1. regarding development of Society, original flat owners agreed to redevelopment of their apartment in 2022 and it is still under construction, then at the time of completion of the building can Individual get benefit of 54/54F ?
2. If the receiver of flat, gifted that flat to his daughter/son at the time of completion i.e. agreement made in his daughter/son’s name, then what’s the tax treatment?
1. regarding development of Society, original flat owners agreed to redevelopment of their apartment in 2022 and it is still under construction, then at the time of completion of the building can Individual get benefit of 54/54F ?
Answer: The benefits of seciton 54/54F, as the case may be, is available, subject to the fulfillment of all conditions laid down in the section. The construction of the new apartment must be completed withing three years from the date of JDA.
2. If the receiver of flat, gifted that flat to his daughter/son at the time of completion i.e. agreement made in his daughter/son’s name, then what’s the tax treatment?
As far as gifting of the property is concerned, there is no tax implication on receipt of flat by your Son or daughter. However, the taxation of the receipt of the flat in your hand through JDA will be governed by the relevant provision of Capital Gains, as discussed in the article.
Thank you very much Sir! Very helpful and self-explanatory article.
Sir, I appreciate you the way you have explained the JDA subject matter. Now, my query is that., ” What tax treatment should be given in the year in which JDA was registered, since tax has been deducted U/s 194IC?” In our example it is FY 2023-24. Thank You.
If the JDA is registered, the entire transaction has to be offered in the year in which the project is completed and completion certificate is received from the competent authority.
Dear Sir,
I have a query regarding Sec 54/54F exemption. In the year of Completion of Project whether the landowner is eligible for Sec 54/54F exemption as he has received residential flats in consideration of the Agreement. Whether exemption will be available as he got more than 1 flat as consideration?
Regards
Dear sir,
Please clarify how to calculate Tax if land owner sells one flat in the FY 2025-26 but before obtaining Certificate of occupation / completion. Thanks in advance.
Dear sir,
Please clarify how to calculate tax If Landowner sells one flat in the year 2025-26 but before receiving certificate of completion certificate. Thanks in advance.
Though this article is restricted to the calculation capital gain under JDA, I want to know if benefit of sec 54 for one house (assuming that Mr A does not own any other house or owns only one house apart from this) to the extent of Rs.1 Cr can be claimed against the LTCG of Rs. 4.26 Cr .
Dear Sir,
Will there be any capital gains tax if the JDA was done between 4 siblings and a builder on a inherited vacant land. The builder will build 7 flats. 3 flats the builder will sell And each sibling will receive one flat each and intend to stay in it.( and dont have any other residential flat or bungalow)
If joint development agreement is entered by a company and a developer then will it be liable pay tax under Capital Gain head in year of agreement only ? As section 45(5A) is not applicable to companies.
Also I just wanted a clarification that whether this is retrospective amendment? I mean if an IND/HUF has entered into an agreement before 1st April 2017 then also this benefit is available to them?
The article clarifies n develops our understanding of the provisions which are relatively new. Mr. Dev is also responding to queries which is rare n shows his commitment.
Thank you Sir
I am very happy as I am getting continuous queries from professionals from all parts of country regarding taxation of JDA through comments here, email and WhatsApp. This is a burning issue in most of the cities. Provisions of section 45(5A) came into effect from A.Y. 2018-19, which is a beneficial provision for the property owners, who enters into JDA. I try to write the articles in a simple language and is always focused to avoid future tax litigations. Based on the various queries received, the answers are summarised hereunder:-
• Benefits of section 54 and 54F is available to the property owners on case to case basis subject to fulfilment of conditions of section 54 and 54F, as the case may be.
• The Stamp Duty Value/Circle Rate/Guideline Value/Ready Reckoner Rate of the newly constructed flat/apartment blocks/house as on the date of receipt of completion certificate plus the cash consideration received, if any, together will constitute the Full Value of Consideration for the purposes of the calculation of LTCG. It’s very clearly mentioned in the Act itself. The Stamp Duty Value/Circle Rate/Guideline Value/Ready Reckoner Rate is determined by the State Government authorities and consider the proportionate cost of land also, while calculating the value.
• The JDA is also considered as Transfer. The conveyance deed executed by the land owner in favour of the new occupants shall transfer the rights of proportionate land in favour of all the new flat owners.
• If the land owner sells his share of rights in the new building before receipt of completion certificate, he will loose the benefits of section 45(5A) and will have to pay the taxes in the year in which such transfer takes place.
The readers are requested to go through my other articles also, link of which is available just above and send feedback. I will be writing another article on the issue of taxation of redevelopment projects of leased building/Co. Op. Hsg. Society soon. Thank you very much to all the readers.
wrong calculation. Where is the benefit of Builder construction value? Why builder constructed without any monetary value??
Dear Sachin sahab, this article is focussed on the taxation in the hands of property owners who enters into JDA with any builder/developer.
As regards your concern regarding why any builder will construct without consideration- this is to say that under JDA, the builders construct a building say consisting of 20 flats and give some flats/apartments to the property owners. The builder retains the balance constructed flats with them, which they sell to other persons and earns income, which is taxable as business income in the hands of builder. I hope your query is satisfactorily answered and the calculation is right Sir.
ln the given example Mr A has not transferred undivided right of four flat recieved. Then why the value of such land was included in the cost and sale consideration?
As provided under section 45(5A), for calculation of Long Term Capital Gains in the hands of the property owners u/s 48, the full value consideration will be the Stamp duty value/guideline value/circle of the land or building or both on the date of completion of the project as received by the owner in the new project alongwith cash consideration. The Stamp duty valuation is done by the State Government Authority and such value shall be deemed to the the full value of consideration.
What Mr. Cyriac is asking is regard to cost of the property transferred, whereas you have clarified regarding the value of consideration received in the form of flats and or cash. What the owner surrenders is only proportionate undivided share in land. The undivided share in land in respect of the flats received is not transferred or in other words, is retained by him. Hence in my view, only the cost of proportionate undivided share in land transferred is to be reduced for Capital gain calculation. Please clarify if I am not correct.
Whether LT Capital Gains on Joint Development is not exempted U/s 54 as it is deemed to Invest in Residential Flats ?
This article is dedicated to the calculation of Long-Term Capital Gains in respect of the properties given to a builder/developer on Joint Development Agreement and has been kept restricted to it for the sake of clarity on the topic. Since the taxability of the Capital Gains will arise in the year in which the completion certificate is issued by the competent authority to the project, Yes, all the provisions of section 54 or 54F as the case may be, is allowable subject to the fulfillment of various conditions to claim the exemption. The various aspects of 54 and 54F have been discussed in detail in my separate articles.
Dear Deorath Sir
Greetings of the Day.
I have just read your article dated 18 Nov. on CG.
My question is regarding valuation as.on date 01.04.2001 For Cost of Acquisition .
As you said Cost.of Acquisition should not exceed FMV on 2001..As a Govt Registered Valuer How can I help the Client/Assessee.
plz guide.
Yours
Madhusudan Myakal
34AB Registered Valuer
mob 9822797642
Dear Shri Myakal, you have to find the guideline value/circle rate/ready reckoner rate as on 01.04.2001 of the area, wherein the property is situated, from the state government authorities to arrive at the FMV.