Taxation of Joint Development Agreement with the builder by legal heir of Ancestral Property
We have inherited the old house property, agricultural land & plots on the death of my father. My father died in 1986. My mother, 2 brothers and one sister were the legal heirs and the names of all 5 persons were muted on the revenue records of the property. My mother expired in the year 2004 and her share was later muted amongst us, 4 persons. We have not executed any family settlement deed or gift deed in respect of any of the property amongst the legal heir. Now, all 4 have entered into a development agreement with a builder whereby the builder will be demolishing the old house and will be constructing a multistoried building. All 4 persons will be getting one flat each in the new scheme plus cash payment of Rs. 90 Lakh each spread over a period of 3 years. Expected month of completion of the construction is August-2026. The builder will be paying cash of Rs. 25 Lakh in the FY 2023-24, Rs. 40 Lakh in the FY 2024-25 & balance Rs. 25 Lakh in FY 2025-26. We have few queries with regard to the taxation & the same is summarized as under:
- Whether the transaction would attract capital gain tax? If yes, in which year?
- We are told that the transaction will be taxable in the FY 2023-24 as I have handed over the possession of the property in the FY 2023-24? If this is so, what if the transaction is not completed and the builder fails to complete the scheme? Whether the income tax amount paid on the transaction will be refundable?
- Can we defer the income tax till the date of completion of the construction of the scheme?
- Alternatively, can we offer the capital gain income for taxation on a proportionate basis spread over the period of construction?
- What will be the TDS amount as the builder is deducting tax @10% on each and every payment? Whether TDS rate is 1% or 10%?
- There is a special provision in the Income Tax Act-1961 which provides for taxation of the Joint Development Agreement (JDA). It is contained in section 45(5A) which was introduced in 2017 to remove the genuine & practical hardships faced by Individual / HUF entering into JDA.
- As per section 45(5A), individuals/ HUF who enter into JDA are liable for capital gains taxation in the year in which the certificate of completion is issued by the competent authority. As a result of section 45(5A), the tax liability gets deferred from the year of mere signing the documents or handing over of possession to the year of completion of construction.
- Before coming to your specific query, let me discuss about the key feature of scheme of taxation as provided by Section 45(5A) as under:
- a) Timing of Taxation:
The liability to pay capital gains tax now will arise only after the project is ‘completed’. The capital gains will be chargeable to tax in the year in which the certificate of completion is issued by a competent authority for the entire or a part of the project.
b) Amount of sale consideration:
For levy of tax, the sale consideration in the hands of the property owner is aggregate of-
(i) Stamp duty value of the property received by the property owner from the builder as his share in the developed property on the date of issue of completion certificate and
(ii) amount received in cash/cheque etc.
c) Owner should not sell the completed portion before completion certificate:
This benefit will not be available if the owner transfers his share in the project to another person before the issue of completion certificate. In such a situation, the capital gains will be taxable in the year in which such transfer took place.
d) Tax Deduction At Source (TDS):
TDS is applicable on the payment to be done by the developer to the property owner pursuant to JDA. TDS is @ 10% on such payments.
- In your specific case,
a) Timing of Taxation:
The capital gain tax liability would arise in the financial year 2026-27 when the completion certificate will be issued and the possession will be handed over to you by the builder. There is no concept of proportionate taxation in case of JDA signed by the owner of the property.
b) Sale Consideration:
For each one of you, the sale consideration would be the Stamp duty valuation of the flat as on the date of completion certificate plus Cash consideration of ₹90 Lakh receivable by you.
c) Cost of Acquisition:
The property on which the present development agreement is signed is an ancestral property originally acquired before 2001. The FMV as on 01.04.2001 will be deemed as the cost of acquisition in the hands of the present owner & will be eligible for indexation benefit also
d) Computation of Capital Gain
The difference between the sale considerations as computed in (b) above & indexed cost of acquisition as computed in (c) above will be the amount of Long Term Capital Gain (LTCG) taxable in the year of completion of the scheme.
e) TDS Claim:
Neither of you should claim the credit of TDS as reflected in the Form No. 26AS (ATS) of the FY 2023-24 to FY 2025-26 and may carry forward for claiming it in the FY 2026-27 when the transaction would be taxable.
[Corrigendum in The Tax Talk Dated 09.10.2023: The only option to save tax on LTCG arising on sale of shares is under section 54F. No exemption against LTCG on sale of shares is available U/s 54EC.]