Capital gains, GST, TDS: Understanding taxes in joint development agreements
₹20 lakh and entered into a JDA with a local builder on 5 June 2021. The agreement stipulated that the builder would construct four flats, three of which would belong to Mr A, with the builder retaining one. The builder would also find buyers for two of Mr A’s flats.
Additionally, the builder agreed to pay ₹20 lakh to Mr A upon signing the JDA, and to complete the project within three years after signing the JDA. What will Mr A's tax liability be, and when will it come due? Read this | Even without indexation, real estate enjoys more tax breaks than any other asset The timing of the land possession transfer is critical for tax purposes. Previously, the signing of the JDA would have triggered the transfer of land possession to the builder, leading to immediate capital gains tax liability for the landowner.
This posed a problem, as landowners were taxed before the project had even begun. This issue was addressed with the introduction of Section 45(5A) of the Income Tax Act, 1961, effective 1 April 2017. Under this section, landowners or HUFs (Hindu undivided family) entering a registered JDA with a builder are required to pay capital gains tax in the year the project receives its completion certificate from the relevant authority.
Thus, the land possession is deemed to occur only when the project is complete. In Mr A's scenario, the project receives its completion certificate on 31 May 2024, and the stamp duty value of the reconstructed flats is ₹1 crore each. With Mr A set to receive one flat valued at ₹1 crore, sales proceeds of ₹2 crore from two flats, and the ₹20 lakh advance, his total consideration amounts to ₹3.20 crore.
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