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Taxability of Capital Gains in case of Specified Agreements.

{Section 45 (5A) of Income Tax Act}

Taxation of Specified Agreements Pre Introduction of Sec.45 (5A): –

Transfer: Includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred.

Applying the definition of transfer, under these Joint development agreements, the transfer took place in the year in which Immovable property, being land or building or both handed over to the developer.

Consequently the capital gains tax liability in the hands of the owner would arise in the year in which the possession of immovable property is handed over to the developer for development, even though the consideration for such transfer may be received after a year are a two.

Taxation of Specified Agreements Post Introduction of Sec.45 (5A): –

Concept of Postponement of taxability of capital gains is being introduced by this section with a view to minimize the genuine hardship being faced by the owner of land or building in paying capital gains in the year of Transfer.

Section 45 (5A) provides as follows:

In case of an assesse being INDIVIDUAL/HINDU UNDIVIDED FAMILY who enters into a specified agreement for development of a Project the capital gain arising from such transfer shall be chargeable to Income Tax as income of the previous year in which the Certificate of completion for the whole or part of the project is issued by the Competent Authority.

Non-applicability of the beneficial Provision:

  • The above said provision will not apply if the assesse transfers his share in the project on or before the date of issue of completion certificate.
  • Thus capital gains tax liability shall be deemed to be arise in the previous year in which such transfer took place.
  • Value of consideration in such a case would be the Fair market value of the land/building on the date of such transfer.

Joint Development Agreement at Glance:

Joint Development Agreement at Glance

Note:

  • The above said provision of Sec.45 (5A) is applicable only to Individual/ Hindu Undivided Family, so the concept of Postponement of Taxation of Capital gains applies to them only
  • As this section is not applicable to Company/Partnership Firm, in case they transfer any land/building for development, tax liability on such capital gains would arise in the year in which the transfer took place. (i.e tax liability would remain as if this section is not introduced)

Example:

Mr. B enters into a Joint Development Agreement with M/s. XYZ Developers Pvt Ltd on 01/04/2018 and handed over the Immovable property to M/s. XYZ Developers Pvt Ltd on the said date and as a result of such agreement, Mr. B is entitled to receive 4 flats out of total 10 flats and in addition to flats an amount of Rs.500000/- and for the said project, Completion certificate is issued by the competent Authority on 01/05/2019.

Fair Market Value of Flat on 15/10/2018: Rs.2500000/-

Fair Market Value of Flat on 01/05/2019: Rs.3500000/-

Fair Market Value of Flat on 31/10/2019: Rs.4000000/-

Land on which JDA was entered was purchased by Mr. B on 01/04/2002 for Rs.1000000/-

Discuss the tax implications if Mr. B transfers 1 flat on 15/10/2018 and another 2 flats on 31/10/2019?

Ans: –

If Mr. B transfers a flat on 15-10-2018:

As when Mr. B transfers a flat on 15-10-2018, on which date Completion certificate is not received by the developer, then in such case tax liability will be:

Sale Consideration = FMV of flat on 15-10-2018 2500000

 

(-) Cost Of Acquisition of Land by Mr. B (1000000*1/4*280/105) (666667)
Net Taxable Long Term Capital Gain 1833333

This amount of rs.1833333/- is taxable under the head Capital gains (Long Term) for the P.Y 2018-19.

On receipt of Completion Certificate (i.e on 01-05-2019):

Sale Consideration = FMV of Flats on 01-05-2019 + Cash Consideration

[(3*3500000) +500000]

 11000000
(-) Cost of Acquisition (1000000*3/4*289/105) (2064286)
Net Taxable Capital Gain (Long Term) 8935714

This amount of rs.8935714/- is taxable under the head Capital gains (Long Term) for the P.Y 2019-20.

Cost of Acquisition for determining capital gains on subsequent sale of share of developed property = Full Value of Consideration as per sec.45 (5A) = 11000000/- for the remaining 3 flats.

If 2 flats were sold on 31-10-2019:

Sale Consideration (2 flats*Rs.4000000) 8000000
(-) Cost of Acquisition (11000000*2/3)  (7333333)
Net Taxable short term Capital Gain 666667

This amount of rs.666667/- is taxable under the head Capital gains (Short Term) for the P.Y 2019-20.

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14 Comments

  1. Biswanath Shaw says:

    I have inherited property (1550 sq ft) development agreement dated 06.11.2017 in ratio 50:50, and One room (186 sq ft) handed over developer and then sale of room (186 sq ft) of Rs.1000000/-, send tax calculation.

  2. Krishan kanwat says:

    I have sold my land 2.5 hectare under a development agreement. The developer to make payment after obtaining RERA number within one month . He will develop the land but will not having any rights in the property till he makes the entire payment . How capital gain to be worked out

  3. Anand says:

    This is a very complex subject. Above writeup is good but then it has loopholes. In the given example Cost of Acquisition of land is only apportioned to 4 flats and no consideration is given to Rs. 5,00,000. Upto sell of first flat calcuations still seem fine.
    But on receipt of completion certificate, Long Term Capital Gain is shown as 8935714. That is incorrect. Because I having not sold remaining 3 flats as on that day, where will I have the money to pay taxes on such a huge Capital Gain? As per my knowledge only Rs. 5,00,000 will be LTCG on day of completion as author has not apportioned any acquisition cost for cash component.
    Cost of acquisition in third example for two flat which were sold out of remaining 3 should have been Rs. 70,00,000. It does not make sense to consider Rs. 5,00,000 received as part of the calculations to consider acquisition cost of remaining flats.
    Its a good attempt at explaining things but there are errors in the example given. Unless author can prove me wrong.

    1. Subrahmanya Aravind Vemparala says:

      You mentioned that, you have not sold 3 flats on the date of completion certificate, how can you pay tax on the ltcg on that date.
      See, it is very simple, you received sale consideration for transfer of your land on the date of completion certificate in the form of flats. So you need to pay tax.
      Actually, you have to pay tax in the year of transfer of land for JDA only, but the law postponed it, as you have not received any thing to pay tax. Whereas, on the date of completion certificate, you have received your 4 flats.

      1. Niranjan Kanade says:

        what will happen if i sold 2 flats before completion but i did not make Sale deed. and only agreement to sale is made and payment is received in multiple installmets.

  4. Virendra Patil says:

    I am one of the members of a coop. hsg.scy. The society owns an open plot The society is contemplaiting entering into a development agreement with a builder, who has proposed to pay the consideration to the society. What may be implecations regarding various taxes and how the society will pay my share of consideration to me

  5. Nandan Mittal says:

    If flats as agreed were received by Mr. B. After completion, and he does not sell them keeps all for himself, is capital gains tax still to be payed by Mr. B and if so how much?

  6. DINESH NARANG says:

    In the given example, how important it is to sell a flat on date of completion certificate? What if the flat is sold within May, 2019 and October, 2019? Will it be counted as a STCG? or capital gain on any flat sold after the date of completion certificate shall always be counted as STCG?

    1. Pallavi says:

      It’s written in section 45 5A that :
      – the Stamp Duty Value to be considered as the sale consideration recieved for transferring land in JDA; &
      -the same Stamp Duty Value is taken as Cost of Acquisition when the completed flats are sold.
      So, basically there are 2 events of taxation. But in the above examples I think you have mixed up both in one. Can you please explain?

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