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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:-
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 Acquisitionas 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-├а-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.
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