Section 455 A of Income Tax Act

Section 45(5A) of the Income Tax Act was introduced to simplify the taxation of capital gains on Joint Development Agreements (JDAs), which are common in real estate. In a JDA, a landowner partners with a developer to exchange land for constructed property, such as flats, without transferring ownership of the land upfront. In return, the developer takes on responsibilities like construction, marketing, legal approvals and property registration.

Before Section 45(5A), capital gains from JDAs were taxed when the agreement was signed, even if the landowner had not yet received the constructed property. This created a mismatch between the time of taxation and the actual receipt of assets.

Under the CBDT circular on Joint Development Agreement under Section 45(5A), the taxation of capital gains is deferred until the competent authority issues the completion certificate. This means the landowner only becomes liable for capital gains tax when the developed property is ready and ownership is transferred, not when the agreement is signed.

This provision applies to real estate transactions involving individuals or Hindu Undivided Families (HUFs) entering into JDAs. It helps align tax liability with the actual possession of the property, easing financial pressure on the landowner while promoting smoother collaboration between landowners and developers.

Before Section 45(5A) was introduced, tax laws required landowners in Joint Development Agreements income tax to pay capital gains tax as soon as they signed the agreement with a builder. This meant that even though the landowners had not yet received any property or money, they were still taxed. This created a financial burden, as they were required to pay taxes without having any immediate returns.

The main issue was that the tax was being applied too early, even before the landowner received their share of flats or money from the builder. This led to a mismatch between when the tax was due and when the landowner actually benefited from the deal.

Recognising this problem, the government introduced Section 45(5A) in 2017 through the Finance Act. The goal was to offer relief to landowners by postponing the capital gains tax until the completion certificate for the developed property was issued.

This ensured that taxes were only paid when the landowner received their share of the property, making the taxation process fairer and more aligned with the timing of the actual benefits received from the deal.

A Joint Development Agreement (JDA) is a partnership between a landowner and a developer. In this approach, the landowner provides the land, and the developer handles the construction and marketing of the project. This approach is increasingly popular in real estate as it offers mutual benefits without the landowner having to sell the land upfront.

In a JDA, the developer manages everything from financing to approvals and sales, while the landowner receives either a share of the developed property or part of the sale proceeds. JDAs are advantageous because the landowner does not need to invest in construction, and the developer does not have to pay for the land, freeing up funds for the project.

-There are three common types of JDAs:

-Revenue-sharing JDA: The landowner gets a percentage of the money earned from selling the property.

-Area-sharing JDA: After construction is completed, the landowner receives a portion of the built-up area (like flats).

-Hybrid Models: These combine both revenue-sharing and area-sharing. The landowner and developer can agree on a flexible mix of money and property, distributing risks and rewards based on their contributions and goals.

Section 45(5A) is especially relevant here as it defers the tax on capital gains until the project is completed and the landowner gets their share. This makes JDAs financially easier for landowners, as they only pay taxes when they actually receive benefits from the agreement.

Section 45(5A) of the Income Tax Act has a significant impact on how capital gains tax is calculated in real estate transactions involving Joint Development Agreements (JDAs).

Before this section was introduced, capital gains tax was levied as soon as the JDA was signed, even though the landowner had not yet received any property or money. This created a burden, as the tax was due before the actual benefit was received.

-Joint Development Agreement Taxability of the Property in the Hand of Owner Under Section 45(5A)

When a landowner enters a Joint Development Agreement (JDA), the taxability of capital gains involves three key factors: the Full Value of Consideration (FVC), the Cost of Acquisition and the Year of Taxability.

-Full Value of Consideration (FVC)

The Full Value of Consideration represents the value of what the landowner receives in exchange for the land. Under Section 45(5A), this is calculated as the Stamp Duty Value (SDV) of the flats or property received, as determined on the date the Completion Certificate is issued.

If any cash is also part of the deal, it is added to the FVC. In simpler terms, the FVC is the total value of the flats or property received, plus any cash paid by the developer.

-Cost of Acquisition

The Cost of Acquisition is the original price the landowner paid for the land. If the land has been held for more than two years, the cost is adjusted using indexation, which factors in inflation over the years.

Indexation ensures the landowner is taxed on the real gains after accounting for the increased cost of living over time. The indexed cost is used to calculate capital gains, reducing the taxable amount.

-Year of Transfer vs. Year of Taxability

The year of transfer refers to when the land is transferred to the developer as per the JDA. However, under Section 45(5A), the taxability arises in the year the Completion Certificate is issued. This means that although the land is legally transferred when the JDA is signed, the tax is deferred until the building is completed and the landowner receives the property.

-Eligibility for Exemption Under Section 54 or 54F

Suppose the landowner purchases a portion of the redeveloped property and makes a payment for it. In that case, they may be eligible to claim tax exemption under Section 54 or Section 54F, depending on the type of property acquired.

Section 54 applies to the reinvestment of capital gains in a residential property, while Section 54F is applicable when the investment is in a new residential property, provided certain conditions are met. This allows the landowner to defer or reduce the capital gains tax liability by reinvesting the proceeds from the transaction into qualifying property.

This structured approach ensures a clear calculation of capital gains while accounting for inflation through the Cost Inflation Index (CII), which adjusts the cost of acquisition to reflect the impact of inflation over time.

-Section 45(5A) of the Income Tax Act: Example

Let us consider an example to understand how capital gains tax is calculated under Section 45(5A):

Here is the Scenario:

• Mr. Ashok purchased a plot of land on December 11, 1997, for ₹5,00,000.

• The Fair Market Value (FMV) of the land on April 1, 2001, is ₹10,00,000.

• On August 19, 2018, Mr. Ashok entered into a Joint Development Agreement (JDA) with A2Z Builders under the following terms:

• Mr. Ashok will receive 2 flats in the developed project.

• He will also receive a cash payment of ₹40,00,000.

• The Stamp Duty Value (SDV) of each flat on this date is ₹30,00,000.

• The project's Completion Certificate was issued on January 5, 2023, and by that time, each flat's SDV had increased to ₹50,00,000.

• The flats were transferred to Mr. Ashok on March 10, 2021.

-Step-by-Step Capital Gains Tax Calculation

• Full Value of Consideration (FVC):

• The FVC includes the SDV of the flats as of the completion date and any cash received.

• FVC = 2 flats × ₹50,00,000 (SDV) + ₹40,00,000 (cash payment)

• Total FVC = ₹1,00,00,000 (for flats) + ₹40,00,000 = ₹1,40,00,000

Cost of Acquisition:

Since the land was purchased before April 1, 2001, the cost of acquisition is the higher of the actual purchase price or FMV as of April 1, 2001.

The indexed cost is calculated using the Cost Inflation Index (CII). Assuming the CII for the year of transfer (2023) is 331, and the CII for 2001 is 100:

• Indexed Cost of Acquisition = ₹10,00,000 × (331/100)

• Indexed Cost = ₹33,10,000

Capital Gains:

• Capital Gains = Full Value of Consideration - Indexed Cost of Acquisition

• Total Capital Gains = ₹1,40,00,000 - ₹33,10,000 = ₹1,06,90,000

Thus, Mr. Ashok’s taxable capital gains under Section 45(5A) would be ₹1,06,90,000 and he will be liable to pay tax on these gains in the year the Completion Certificate was issued, i.e., in 2023.

Section 45(5A) plays a crucial role in shaping tax planning strategies for both real estate developers and landowners engaged in Joint Development Agreements (JDAs). By delaying the tax on capital gains until the Completion Certificate is issued, this provision gives both real estate developers and landowners a valuable opportunity to optimise their tax strategies.

One smart approach is to reinvest the capital gains in ways that ensure long-term financial security. Medical insurance is a key consideration here, offering both protection against rising healthcare costs and potential tax benefits.

After realising capital gains from a JDA, developers and landowners can allocate some of this income toward purchasing or upgrading health insurance policies, safeguarding their future while optimising taxes.

-Tax Deductible Premiums Under Section 80D

Under Section 80D of the Income Tax Act, individuals can claim deductions on the premiums paid for cheap health insurance policies for themselves, their spouses, children and even their parents. By using a portion of their capital gains to invest in health insurance, landowners and developers can reduce their taxable income.

A robust health insurance plan not only provides a financial cushion against medical emergencies but also complements their capital gains tax planning under Section 45(5A).

-Health Insurance for Real Estate Developers

For real estate developers, who often face high financial risks in their line of work, securing comprehensive health insurance policies is crucial. Capital gains realised under Section 45(5A) can be used to invest in group health insurance plans for employees or family floater policies.

The right health insurance policy not only ensures personal and professional protection but also helps with effective tax planning, maximising the financial gains from JDAs.

Section 45(5A) has reshaped the taxation of Joint Development Agreements (JDAs), providing clarity and a deferred tax liability on capital gains. Let us explore some real-life examples of this provision being applied and how tax authorities treated these cases.

-Example 1: Landowner Receives Flats in a Redeveloped Project

Mr. Mukherjee, a landowner, entered into a JDA with a developer in 2018. He agreed to exchange his land for three flats in the redeveloped project with no upfront cash. The stamp duty value of each flat was ₹40 lakh at the time of signing the agreement.

However, as per Section 45(5A), Mr. Mukherjee’s tax liability did not arise immediately. Instead, he became liable to pay capital gains tax only when the Completion Certificate for the project was issued in 2022.

By then, the flats' stamp duty value had increased to ₹60 lakh each. The tax authorities calculated the capital gains based on the 2022 value of the flats, deferring his tax payment until the completion of the project.

-Example 2: Sale of Ownership Before Completion Certificate

In another case, Ms. Verma entered into a JDA with a developer and was to receive two flats. Before the project was completed, she decided to sell her rights in the project to a third party.

Since she transferred her rights before the Completion Certificate was issued, the tax authorities treated this as a regular capital gains transaction. Ms. Verma was taxed in the year of sale.

-Handling by Tax Authorities

In both cases, the tax authorities followed the guidelines under Section 45(5A), ensuring that capital gains were taxed either at the time of project completion or when the rights were transferred. This approach provides greater clarity and defers tax liabilities, making JDAs more financially manageable for landowners.

Section 45(5A) of the Income Tax Act has introduced a significant change in the taxation of Joint Development Agreements (JDAs) by deferring the tax on capital gains until the Completion Certificate is issued.

This provision brings relief to landowners by aligning the tax payment with the realisation of the actual value of the property. It also adds flexibility for real estate developers and simplifies tax handling for transactions involving property exchanges.

For landowners and developers, the impact on real estate taxation is profound, allowing better tax planning and cash flow management. However, the specific rules surrounding capital gains calculation and potential tax liabilities remain complex.

As the real estate market evolves, this section could see further clarifications and refinements. It is essential to consult tax professionals when engaging in JDAs to ensure full compliance and optimal tax strategies, ensuring no surprises during the taxation process.