Capital gain on Land & Building under Joint development Agreement


1. Introduction:-

  • Under the existing provisions of section 45, capital gain is chargeable to tax in the year in which the transfer takes place except in certain cases.
  • The definition of ‘transfer’, inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal right has not been transferred.
  • In such a case, execution of Joint Development Agreement between the owner of immovable property and the developer triggers the capital gain tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.
  • With the view to minimize the genuine hardship which the owner of land may face in paying capital gains, it is proposed to insert a new sub section (5A) in section 45.

 2. Section 45(5A) - Taxability of Capital gain:-

  • Where the capital gain arises to the assesse, being an individual of HUF, from the transfer of capital asset, being land or building or both, under a specified agreement, the capital gain 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.
  • Where the assesse transfers his share in the project on or before the date of issue of said certificate, the capital gains shall be deemed to be the income of the previous year in which such transfer takes place.
  • For the purpose of section 48, the Stamp Duty Value(SDV) of his share, on the date of issue of said certificate, as increased by the consideration received in cash, if any, shall be deemed to be the full value of consideration.

 3. Section 194-IC Liability to deduct TDS:-

  • As per section 194-IC, if under a joint development agreement any developer pays an amount to the land owner in addition to the share in project, such developer shall deduct TDS @ 10% on such payment.

 4. Example:-

  • Mr. X purchased a residential plot on 01.01.1998 for 50,00,000. FMV of plot as on 01.04.2001 is 65,00,000. Alpha builders enters into a development agreement with Mr. X on 01.05.2017 on the following terms and conditions,
  • Mr. X will hand over the possession of plot to alpha builders on 01.05.2017.
  • Alpha builders will pay a cheque of 60,00,000 to Mr. X on 01.05.2017.
  • Alpha builders will construct 10 residential units on the plot of land and will give 6 units to Mr. x. The 10 units will be completed by 30.06.2019 and on that date 6 units will be handed over to Mr. x
  • The stamp duty value of plot as on 01.05.2017 is 2 crore.
  • The stamp duty value of each flat on 30.06.2019 is 45,00,000.4
  • Case 1: The project completion certificate is issued by the authority on 30.06.2019. 6 units are handed over to Mr. x on 30.06.2019.
  • Case 2: The project completion certificate is issued by the authority on 30.04.2020 and on that date the stamp duty value of each flat is 50,00,000. 6 units are handed over to Mr. x on 30.04.2020.

 5. Analysis of Example:

  • There is a ‘transfer’ on 01.05.2017 in the hands of Mr. X since he has given possession of residential plot pursuant to development agreement.
  • However as per section 45(5A) introduced by finance act 2017, the capital gains shall not be taxable in the previous year 31.03.2018 but shall be taxable in the previous year in which the certificate of completion is received from competent authority.
  • Section 45(5A) is applicable since the assesse is an Individual.
  • The holding period of residential plot shall be taken from 01.01.1998 to 30.04.2017 i.e. Long Term.
  • As per section 55, the COA of plot is 50,00,000 or FMV as on 01.04.2001, whichever is higher. Therefore, COA of plot is 65,00,000
  • Sale Consideration= SDV on the date of issue of completion certificate of his share plus consideration received in cash.
  • Capital gain shall be worked out as follows:-

Case 1: Assessment Year 2020-21

Particulars Working Amount
Sale Consideration
SDV of 6 flats on 30.06.2019 + Cash received
(45,00,000*6 + 60,00,000) 3,30,00,000
Less: Indexed COA 65,00,000*272/100 1,76,80,000
Long Term Capital Gain 1,53,20,000

Case 2: Assessment Year 2021-22

Particulars Working Amount
Sale Consideration
SDV of 6 flats on 30.04.2020 + Cash received
(50,00,000*6 + 60,00,000) 3,60,00,000
Less: Indexed COA 65,00,000*272/100 1,76,80,000
Long Term Capital Gain 1,83,20,000