Join Land Development Agreements: Tax Implications

Summary: A Joint Development Agreement (JDA) is a contractual arrangement between a landowner and a developer, where the landowner provides land, and the developer undertakes property construction and development. JDAs are common in India’s real estate sector and can follow revenue-sharing, area-sharing, or hybrid models. Taxation for JDAs primarily falls under Section 45(5A) of the Income Tax Act, applicable to individual and HUF landowners. Capital gains are deferred to the year the project’s Completion Certificate (CoC) is issued, and the tax rate depends on whether gains are long-term (20% with indexation or 12.5% without) or short-term (taxed at slab rates). Monetary consideration and fair market value of the developed property are included in the calculation. TDS under Section 194IC is deducted at 10% on monetary consideration. JDAs benefit landowners by monetizing their land without upfront investment and developers by accessing land without outright purchase, fostering urban real estate development. Compliance includes maintaining records, deducting TDS, and disclosing income in tax returns.

A Joint Development Agreement (JDA) or collaboration with land developer is a very popular tool in today’s real Estate industry.

JDA is contractual arrangement between a landowner and a developer, where the landowner contributes land, and the developer undertakes the responsibility of constructing and developing the property.

This collaboration is common in India, particularly in real estate, I am sure you must have seen an example of this in Gurugram (South City – II, DLF Phase I, Land development in Sohna and other multiple locations in growing cities like Gurugram, Noida, etc.), as it allows for sharing of resources and profits.

Below is a detailed explanation of JDAs, their taxation under capital gains, TDS under Section 194IC, and other key aspects.

1. Key Features of Joint Development Agreements

A. Types of JDAs:

• Revenue Sharing Model: The landowner receives a portion of the revenue from the sale of developed property.

For instance, the landowners receive 60% of gross revenue from sale of the developed land which shall be sales value for the land owner for his land. The remaining 40% retained by the developer and it becomes his revenue.

• Area Sharing Model: The landowner gets a specific portion of the developed property (e.g., apartments, commercial units).

For instance, Mr. X owns a 550 Sq. yds. Plot in south city, Gurgaon and enters into a Joint Development Agreement with ABC Builders. ABC Builder agrees to construct 4 Floors plus parking and as compensation to his construction services he shall be allowed ownership of 1 Flat. Here the fair market value of the 3 flats shall be sales value of the land for the land owner and the fair market value of 1 flat given to ABC Builder shall constitute it’s revenue.

• Hybrid Model: A mix of revenue and area sharing.

For instance, In the above example, ABC Builder pays Rs. 25 Lakhs to Mr. X in addition to the 3 Flats, then the sale value of the land shall be total of fair market value of the 3 Flats added with Rs. 25 Lakhs.

B. Advantages:

• Landowner: Can monetize their land without upfront capital investment.
• Developer: Gains access to land without purchasing it outright.

2. Taxation of JDAs Under Capital Gains

The taxation under capital gains for JDAs is governed primarily by Section 45(5A) of the Income Tax Act, 1961.

A. Applicability of Section 45(5A)

• Section 45(5A) was introduced to address the timing and valuation of capital gains in JDAs.
• It applies only to individual and HUF landowners entering into a JDA for the development of real estate.
• The year of taxation of capital gains is deferred to the year in which the Certificate of Completion (CoC) for the project is issued by the competent authority.

3. Calculation of Capital Gains

A. Full Value of Consideration:

• • The stamp duty value of the landowner’s share in the developed property on the date of the CoC.
  • Any monetary consideration received is also included.

B. Capital Gains Formula:

• • Option – I (20% Tax) : Capital Gains = Full Value of Consideration – Indexed Cost of Acquisition.
  • Option – II (12.50% Tax) : Capital Gains = Full Value of Consideration – Cost of Acquisition.

C. Tax Rate:

• • Long-Term Capital Gains (LTCG): 20% with indexation benefits (if the property is held for more than 24 months).
  • Long-Term Capital Gains (LTCG): 12.50% without indexation benefits (if the property is held for more than 24 months).
  • Short-Term Capital Gains (STCG): Taxed at slab rates.

D. Important Exclusions:

• • Section 45(5A) does not apply to companies, partnerships, or any landowners other than individuals and HUFs.
  • Landowners other than individuals and HUFs are taxed in the year the agreement is executed.

4. Benefits of JDAs

• Defers tax liability for landowners (individuals and HUFs) until the CoC is issued.
• Avoids upfront land acquisition costs for developers.
• Promotes urban real estate development.

5. Relevant Notifications and Circulars

• Section 45(5A): Introduced by the Finance Act, 2017.
• Section 194IC: Introduced by the Finance Act, 2017, applicable from April 1, 2017.
• CBDT Clarifications:
• • Circular No. 36/2016 provides guidance on the taxation of JDAs.
  • Rule 11UAE specifies the valuation method for calculating the consideration.

6. Summary Table

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