Joint Development Agreement: What is Section 45(5A) Of Income Tax Act
A lot of landowners want to build a home on their property. Nevertheless, the landowner can lack the funds and other assets necessary to support a significant building project. In these situations, the landowners provide their property to a builder so that the latter can construct it and receive payment. A 'joint development agreement' is the term used for this arrangement. Section 45(5A) of the Income Tax Act describes how income resulting from this special arrangement is taxed.
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What is a Joint Development Agreement?
An agreement between a builder and a landowner is known as a JDA. Without giving up ownership, the landowner grants the builder access to his property. On the property, the builder will construct apartments or flats and handle all the necessary tasks. These may include promoting the property, obtaining the necessary legal approval, and registering the apartments in the buyer's name.
A predetermined number of apartments or a portion of the proceeds from the sale of the apartments will be given to the landowner once they are constructed. It is just like a barter agreement. Both the builder and the landowner benefit from this arrangement since the builder does not have to spend money on purchasing land that may be used for building, and the landowner does not have to spend any money on construction. This contributes to the production of value for both sides.
What is Section 45(5A) Of Income Tax Act
The Income Tax Act's Section 45(5A) was created to make it easier to tax capital gains on Joint Development Agreements (JDAs). These are frequently seen in the real estate industry. In a joint venture agreement (JDA), a landowner and a developer trade land for built property, like apartments, without giving up ownership of the land up front. In exchange, the developer assumes duties such as marketing, building, obtaining permits, and registering the property.Â
Prior to Section 45(5A), capital gains from JDAs were subject to taxation at the time of signing. It is regardless of whether the landowner has yet to receive the completed property. As a result, there was a discrepancy between the actual receipt of assets and the taxation date. Section 45(5A) of the CBDT circular on the Joint Development Agreement states that capital gains taxation is postponed until the completion certificate is issued by the appropriate authorities. This implies that the landowner is not subject to capital gains tax at the time of agreement signing, but rather only when the developed property is ready and ownership is transferred.Â
When individuals or Hindu Undivided Families (HUFs)Â sign into JDAs for real estate, this clause is applicable. It facilitates more seamless cooperation between landowners and developers while relieving financial strain on the landowner by bringing tax obligations into line with actual property ownership.
Need for Section 45 (5A) of the Income Tax Act
Landowners in Joint Development Agreements were compelled by tax regulations to pay capital gains tax as soon as they signed the agreement with a builder, prior to the introduction of Section 45(5A). This meant that the landowners were still subject to taxes even if they had not yet received any money or property. They had to pay taxes even though they didn't have any returns right away, which put a strain on their finances.Â
The primary problem was that the tax was being applied too soon. This is even before the landowner had received their portion of the builder's money or apartments. As a result, there was a discrepancy between the tax due date and the landowner's real benefit from the transaction.
In order to address this issue, the government passed the Finance Act in 2017 and added Section 45(5A). The intention was to provide landowners with relief by deferring the capital gains tax until the developed property's completion certificate was granted.Â
This made the taxation procedure more equitable and in line with when the real advantages of the transaction occurred by guaranteeing that taxes were only paid when the landowner received their portion of the property.
Taxability Of Income Arising From Joint Development Agreements
Taxability in the hands of the Property Owner
Three factors make up capital gains taxation: the complete value of consideration, the acquisition cost, and the year in which taxability is determined.Â
The FVC, or full value of consideration: FVC is equal to the stamp duty value of the property you got on the day the completion certificate was issued plus any cash you may have received.
Acquisition Cost:Â Acquisition cost equals the land's purchase price. In order to account for inflation over time, the cost of land must be indexed up to the year it is transferred to the developer if it has been held for more than two years.Â
Transfer year:Â The year that land is transferred under a JDA is known as the year of transfer.Â
Taxability year i.e. the year when the owner must pay taxes: Capital gains are the profits you receive when you trade land for apartments. You must pay taxes on these capital gains in the year that the certificate of completion for all or a portion of the property is given, in accordance with Section 45(5A). This implies that you will be required to pay taxes in the year that the construction project is finished.Â
However, the assessee will be required to pay taxes for the year in which the transfer occurred if he transfers his part of the project before the completion certificate is given.Â
Computation of Capital Gains tax under Section 45(5A)
Full Value of Consideration | Stamp Duty Value of the property + cash payment |
Less : Indexed Cost of Acquisition | Purchase Price of land (COA) x ( Cost Inflation Index of the year of transfer/Cost Inflation Index of year of purchase*) |
Capital Gains | xxxx |
The acquisition cost will be the actual cost or the fair market value (FMV) as of April 1, 2001, whichever is higher, if the asset is purchased before that date.
Example of Applicability of Section 45(5A)
Mr. Ajay bought a piece of land for Rs. 5,00,000 on December 11, 1997. As of April 1, 2001, the fair market value is Rs. 10,000,000. He signed a JDA with XYZ Builders on August 19, 2018, which included the following terms and conditions.Â
Mr. Ajay will get two apartments in the completed project and a check for Rs. 40,000,000.Â
On August 19, 2018, XYZ Builders will take control of the plot from Mr. Ajay. Each flat's stamp duty value on that day was Rs. 30,000,000.
On January 5, 2023, the project's certificate of completion was granted, and each apartment's stamp duty value was Rs. 50,000,000 at that time. On March 10, 2021, the builder turned over the apartments to the landowners.
Computation of Capital Gain
- | Calculations | Amount (in Rs.) |
Full value of consideration (SDV of the 2 flats as on January 5, 2023 + Cash | (50,00,000 x 2) + 40,00,000Â | 1,40,00,000 |
Less : Indexed COA | 10,00,000 x (280 (CII for 2018-19)/100 (CII for 2001-02)) | 28,00,000 |
Long Term Capital Gain as on 5th Jan 2023 | Â | 1,12,00,00 |
Important things to remember:Â
Where the JDA is registered, Section 45(5A) is applicable.Â
The property should be recorded in the owner's books as capital assets rather than as stock in trade of the firm.Â
Either an individual or HUF will be the owner.Â
The owner should wait to transfer the property until they have received the completion certificate.Â
This benefit is not available if the full sale price is paid in cash or other monetary terms rather than as a portion of the property.
Taxability in the Hands of Developer
The property that the builder/developer constructs will be regarded as stock-in-trade. As a result, "Income from business and profession" will be the type of income received from the sale of such property. He will be able to deduct the business expenses he incurred in developing the land, and the income will include the proceeds from the sale of the property. The remainder will be subject to taxes.Â
Section 194-IC - TDS on Payment Made Under JDA
According to the JDA, the real estate developer is responsible for deducting 10% TDS from all payments made in cash or another form in addition to the project share. However, such TDS must be completed at 20% if the owner's PANÂ is unavailable.Â
Section 45(5A) & Tax Planning for Property Owners and DevelopersÂ
The tax planning methods of landowners and real estate developers involved in Joint Development Agreements (JDAs) are significantly influenced by Section 45(5A). This clause offers landowners and real estate developers a significant chance to maximise their tax plans by postponing the capital gains tax until the Completion Certificate is granted. Reinvesting the capital gains in ways that provide long-term financial security is one wise strategy. A crucial factor in this situation is medical insurance, which provides both prospective tax advantages and protection against growing healthcare expenses.Â
Developers and landowners can protect their future while maximising their tax returns by using a portion of their capital gains from a JDA to buy or upgrade health insurance policies.
Section 80D Tax Deductible:Â Premiums People can deduct the premiums they pay for affordable health insurance policies for themselves, their spouses, their kids, and even their parents under Section 80D of the Income Tax Act. Landowners and developers can lower their taxable income by investing a percentage of their capital gains in health insurance. A strong health insurance plan supports their capital gains tax planning under Section 45(5A) and acts as a financial buffer against medical emergencies.
Health Benefits for Developers of Real Estate: Obtaining comprehensive health insurance plans is essential for real estate developers. They frequently face significant financial risks in their area of business. Employee group health insurance plans or family floater policies may be purchased with capital gains earned under Section 45(5A). In addition to providing professional and personal safety, the appropriate health insurance coverage aids in efficient tax planning, maximising the financial benefits of JDAs.
Conclusion
The Income Tax Act's Section 45(5A) has significantly altered how Joint Development Agreements (JDAs) are taxed by postponing the capital gains tax until the Completion Certificate is granted. Landowners benefit from this clause since it aligns tax payments with the property's actual value. Additionally, it facilitates tax management for transactions involving property exchanges and gives real estate developers more options. The impact on real estate taxes is significant for developers and landowners, enabling improved cash flow management and tax planning. Nonetheless, there are still many intricate regulations pertaining to the computation of capital gains and possible tax obligations. There may be more clarifications and improvements made to this section as the real estate market develops. When participating in JDAs, it is imperative to seek advice from tax experts to guarantee complete compliance and the best possible tax strategies, preventing any unpleasant surprises throughout the taxing process.
FAQ
Q1. When does tax liability arise under a Joint Development Agreement (JDA)?
The issuance of the project's Completion Certificate, not the transfer of the land, initiates the capital gains tax obligation in a JDA. This guarantees that taxes are paid when the worth of the property is realised.
Q2. Is GST applicable on a Joint Development Agreement?
Yes, JDAs are subject to GST. However, the developer or builder, not the landowner, is responsible for paying GST under the reverse charge mechanism (RCM). Before the Completion Certificate is issued, the developer must pay the GST obligation.
Q3. Can the owner claim the benefit of JDA if the entire consideration is received in cash?
No, JDA only applies in cases where the full or partial consideration is paid in the form of a property share.Â
Sec. 45(5A)'s definition of "specified agreement" solely takes into account the following factors:Â
A consideration in the form of a cash payment plus a project share.Â
Only project shares, not monetary compensation, are taken into account.Â
Therefore, it is not a "specified agreement" and, as a result, Sec. 45(5A) will not apply if the landowner is solely to receive cash compensation.Â
Q4. What if the JDA is not registered?
If the JDA is not registered, it will not be regarded as a "transfer," and Section 45(5A) will not be applicable. Instead, the regular requirements of the Income Tax Act will apply.
Q5. Why was 45(5A), a specific provision for the taxability of JDA, introduced?
According to the fundamental idea of capital gains tax, the tax obligation starts the year the asset (land) is transferred, or the year the property is given to the recipient. For the owners, however, this created a difficult situation because they had to pay the capital gains tax in the year that the JDA was entered into, which was quite expensive. Despite not having been paid by the developer yet, the owners were nevertheless required to pay taxes. Furthermore, the income tax department would apply Section 50D of the Income Tax Act. This ignored the lengthy completion times of real estate projects and instead recognised the fair market value on the date of land transfer as the whole value of consideration. In order to remedy this issue, the Finance Act of 2017 inserted Section 45(5A).
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