For property owners seeking to commercialize their land, Joint Development Agreements (JDA) are one of the most sought out options. These agreements have their own set of concerns, particularly regarding taxation of capital gains. This essay aims to present an analysis concerning capital gains tax with respect to Joint Development Agreements.
1. Exemption Under Section 54 or Section 54F
Section 54: Under this section, a long-term capital gain will be exempted provided that the gain is used towards the purchase or construction of a new residential house. One important caveat is that if the property transferred is not a “residential house”, Section 54 may not apply.
Section 54F: An exemption will be available if the capital gains are used towards purchase of one residential property. However, the courts have permitted exemption in case of multiple flats if those flats are treated as one residential unit.
Key Conditions:
- You must not own more than one residential property on the date of transfer.
- Investment in more than one flat may stir litigation but is still permissible based on the particular facts of the case.
2. Impact of Delays Beyond Three Years
For exemptions under Section 54 or 54F, the newly acquired residential property should be:
- Acquired within 2 years or
- Build within 3 years from the date of transfer.
If the Completion Certificate is issued after the stipulated period of 3 years due to delays of the developer, courts have time and again noted that it should not be a hindrance to claiming the exemption. It is equally important to have the proper documentation to show that the delay was not the fault of the taxpayer.
3. Calculation of Capital Gains
- Cost of Acquisition: In case of gifted properties, the cost of acquisition is simply the FMV at the time of gift, updated to today’s date.
- Full Value of Consideration: The consideration will include the monetary value of the flats received and all other payments made.
- Indexed Cost of Acquisition: The cost of acquisition is calculated by issuing the fair market value with the cost of inflation index.
- Capital Gains:
- Capital Gain = A – B, where, A is the full value of consideration, B is the indexed cost of acquisition.
- Exemption can be claimed under section 54F for the residential units to be retained for personal use with restrictions.
4. Taxation on Sale of Remaining Flats
- Short-Term or Long-Term Capital Gains:
- The holding period for computing Capital Gain starts on date of possession. (Completion Certified).
- If the flats are disposed of within 36 months of the date of possession, then the gain would be Short-term Capital Gains STCG and taxed at slab rates.
If the asset is sold after 36 months, the profits from it are considered as Long-Term Capital Gains (LTCG) and are subject to taxation of 20% with indexation.
Key Recommendations
- Track the JDA and the Completion Certificate meticulously, along with the delays caused by the developer.
- Ensure that the indexed cost and capital gains are accurately estimated and reported.
- Seek the exemptions available under Section 54F while keeping in mind the conditions attached to avoid litigation.
- It is recommended that for specific advice, contact a tax professional to help you with your filings.
Conclusion
While JDAs offer an excellent way to monitize land, they also carry a host of tax issues. Knowing the taxability of the capital gains and the reliefs that can be claimed helps to reduce the tax incurred. Ultimately, the associated risks of disputes and tax non compliance require proper documentation and planning.
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Author: Shubham Goyal – Email: casgpj@gmail.com – Phone: 8171582583
Disclaimer: This article is for informational purposes only and does not constitute professional advice. Shubham Goyal assumes no responsibility for actions taken based on this content.
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