Joint Development Agreement (Section 45(5A) of Income Tax Act)

Joint Development Agreement (JDA):

A Joint Development Agreement (JDA) is a registered contract in which a landowner partners with a builder to construct a real estate project on the specified land or property. The Builder redevelops the property at their own cost and manages tasks like obtaining approvals, marketing, and registration. After the development, the landowner receives either a share of the flats or a portion of the sale profits.

JDA benefits both parties include:

• Landowner avoids construction costs

• Builder avoids land acquisition expenses

JDA applies only when payments include a share in the property, either partially or fully. If only cash is received, it is not a ‘Specified Agreement’, and Sec. 45(5A) shall not be applicable.

The Specified Agreement in Sec 45(5A) includes:

• Project share with cash consideration.

• Project share without cash consideration.

JDA Taxability of Income in India – Property Owners

• When the Property owner transfers an asset, it is considered a transfer and triggers the capital gain tax under the Income Tax Act.

• The Full Value of Consideration (FVC) is based on the Stamp Duty Value (SDV) of the owner's project share on the completion certificate issuance date.

• Capital gains are calculated as the difference between the FVC and Asset Acquisition Cost by the owner.

• Capital gains arise when the completion certificate is issued for the project and triggers the tax based on the share in the property.

JDA Taxability of Income in India – Developers

1. For a builder/developer, the Constructed property is considered stock-in-trade, and the property sold income is classified as "Income from business and profession.”

2. Developers can deduct business expenses from the sales profits, with the remaining balance as business income.

3. Under Section 194-IC of the Income Tax Act, real estate developers must deduct 10% TDS on payments made to landowners along with a share in the project. If the landowner's PAN is unavailable, the TDS rate increases up to 20%.

Exemptions:

If a Property owner buys and pays for part of the redeveloped property (residential), they can claim an exemption under Sections 54 to 54F depending on the nature of such property.

Individual vs Companies:

• For Individuals or HUFs, capital gains on a Joint Development Agreement (JDA) are taxable upon receiving the completion certificate and possession transfer.

• For companies, capital gains are taxable when the agreement is executed, as rights transfer at signing the agreement.

Budget 2024

• Under Budget 2024, the indexation benefit for property sales was reduced to 12.5% for long-term capital gains (LTCG). However, an option has been given to people who have purchased property before Budget 2024 but sold after the Budget.

• The Proposed amendment allows taxpayers to choose between a 12.5% LTCG rate without indexation or a 20% rate with indexation for properties purchased before July 23, 2024.

Example 1: Landowner’s Tax Liability

Scenario:

Alex (Landowner) owns a land worth ₹1 crore. Tharun (Developer) enters into a Joint Development Agreement with Alex, where Alex will receive 50% of the developed property, valued at ₹4 crore (total). The completion certificate for the project is issued, and possession of the developed property is transferred to Mr. A.

Solution:

1. FMV of Property Received by Mr. A: ₹2 crore (50% of ₹4 crore).

2. Cost of Acquisition (COA): ₹1 crore (purchase price of land).

3. Capital Gain: ₹2 crore (FMV) – ₹1crore = ₹1crore. 4. Tax Payable (LTCG Tax): ₹1crore × 12.5% = ₹12.5 lakhs

Conclusion: Alex will pay ₹12.5 lakhs as long-term capital gains tax.

Example 2: Developer’s Tax Liability

Scenario:

Alex (Landowner) gives 50% of the developed property to Tharun (Developer) in a JDA. The total value of the developed property is ₹4 crore. Tharun sells the 50% share (worth ₹2 crores) for ₹2.5 crores.

Solution:

1. Profit from Sale: ₹2.5 crore (sale price) – ₹2 crore (cost of property received) = ₹50 lakhs.

2. Tax Payable (Business Income): The ₹50 lakh is taxed as business income at the applicable corporate tax rate (assume 30%).

3. Tax Payable = ₹50 lakh × 30% = ₹15 lakh.

   
   

Conclusion: Tharun will pay ₹15 lakh as tax on business income.

Note: The Above examples do not consider the indexation benefit, as outlined in the provisions of the 2024 Budget.

Capital Gains Calculation for Mr. A (Landowner):

• Capital Gains in Year 2:

  Mr. A’s 40% share in the property is valued at 40% of ₹10 crore = ₹4 crore (stamp duty value). Capital Gain = Stamp Duty Value − Cost of Acquisition

= ₹4 crores − ₹1crore = ₹3 crores.

Tax Implication: ₹ 3 Crores × 12.5% = ₹ 37.5 Lakhs

• Capital Gains in Year 7:

  Sale Consideration: Mr. A sells his 40% share of the flats for ₹8 crores.

  Cost of Acquisition = ₹ 4 crores.

  Capital Gains = ₹ 8 Crores – ₹4 Crores = ₹ 4 Crores

  Tax Implication: ₹ 4 Crores × 12.5% = ₹ 50 Lakhs.

When Agreement, Transfer, and Sale Occur in Different Years Scenario:

• Year 1: A Joint Development Agreement is executed between Alex (Landowner) and Tharun (Developer). Cost of Acquisition of Land: ₹1 crore (This is the cost to Alex for the land).

• Year 2: Completion certificate is issued for a total of 10 Flats. The Stamp Duty Value at Completion is ₹10 crore.

Ownership Share: Alex owns 40% of the flats (4 flats), and Tharun owns 60% of the flats (6 flats).

• Year 3: Tharun sells his 60% share of the property (6 flats) for ₹12 crore.

• Year 7: Alex sells his 40% share of the property (4 flats) for ₹8 crore.

Tax Implications in the Hands of Developer:

• In Year 3, Tharun (Developer) sells his respective shares for ₹ 12 Crores. Developers can deduct business expenses from the Sales profits, and the balance will be treated as "Income from business or profession".

Summary:

In Joint Development Agreements (JDA), the timing of the agreement, land transfer, and property sale in different years results in distinct tax implications for the landowner and developer. Firstly, the agreement happens with no immediate tax liability. Then the land transfer to the builder triggers capital gains for the landowner based on its sale value and acquisition cost. At last, the sale of the developed property eventually generates additional capital gains for landowners on their respective shares. For developers, income from business or profession is determined by deducting construction costs from total sales proceeds. Tax calculations vary at different stages.