Joint Development Agreement under the spotlight of the Income Tax Department

 

In a significant move, the Central Board of Direct Taxes (CBDT) has directed investigation units across the country to gather and scrutinize data on JDAs from the financial years 2020-21, 2021-22, and 2022-23. This initiative targets cases where landowners received completion certificates (CCs) or occupancy certificates (OCs) but have not paid the required capital gains tax.

The Income Tax Department is stepping up its efforts to ensure compliance with capital gains tax regulations. If you’re a property owner who entered into a joint development agreement (JDA) with a builder, this is critical information you need to know.

Under Section 45(5A) of the Income Tax Act, any property owner signing a JDA must pay tax on capital gains once the completion or occupancy certificate is issued. The capital gain is calculated as the difference between the indexed acquisition cost of the land and the total consideration received from the builder, which could be in the form of cash, residential units, or commercial spaces.

It may be noted that the tax rates are as under:

1. Long-term capital gains (property held for 2+ years): 12.5% tax rate.

2. Short-term capital gains (property held for less than 2 years): tax rates vary from 10% to 39% based on the assessee’s income slab.

One may note that prior to 2017, capital gains tax was payable upon the execution of the JDA. However, recognizing the liquidity challenges faced by property owners, regulations were relaxed to defer the tax payment to the year in which the CC/OC is received. Despite this leniency, the CBDT has observed that many property owners have failed to pay capital gains tax even after leasing or renting out their newly developed properties post-completion. This non-compliance could invite penal actions.

The CBDT’s directive serves as a wake-up call to all property owners involved in JDAs to ensure compliance with tax regulations. Failure to adhere to these requirements could result in scrutiny and penalties.

What Taxpayers who have done JDA should do now:
1. Review Your Agreements: Double-check if your JDA falls within the assessment period (2020-21, 2021-22, 2022-23).

2. Verify Tax Payments: Ensure that you’ve filed capital gains tax in the year you received the CC/OC.