Section 45(5 A) of Income Tax Act

A Joint Development Agreement (JDA) is a legal agreement between a landowner and a developer, where the first party owns the land while the latter carries out a development project. The developer is responsible for everything from planning, construction activities, marketing, legal compliance and sales, while the owner only maintains ownership.

In a JDA, the developer typically does not pay a lump sum amount to the owner. Instead, they have a revenue-sharing or area-sharing arrangement, where the owner gets a certain number of flats or a portion of the proceeds from sales. Once the project is completed, the developer will transfer flats or revenue, as per the agreement.

The agreement is contractual and governed under the Indian Contract Act and other state laws. Key clauses in a JDA include area, units, revenue, project milestones, handover terms, and legal/municipal clearances.

Types of Joint Development Agreements

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) simplifies the taxation of capital gains and defers the taxability of Joint Development Agreements for real estate owners. As per its provisions, the taxpayer is liable to pay capital gains tax in the year the construction is completed, and a completion certificate is issued for part or all of the property.

However, if the taxpayer transfers the property before it’s constructed, tax will be applicable in the year of transfer. The capital gain on which tax is applicable under Section 45(5A) is the monetary compensation received by the owner plus the stamp duty value of their share.

Read Also: Section 194J of the Income Tax Act

The following aspects showcase the provisions and applicability of Section 45(5A):

Eligible Taxpayers

The assessee must be either an individual or an HUF (Hindu Undivided Family) and the owner of land, building or both. Partnership firms, companies, LLPs, and cooperative societies are not eligible for its benefits.

Transfer of Land/Building

The JDA requires the transfer of land, building or both in exchange for shared ownership or monetary compensation. The transfer is defined as per Section 2(47)(v), which involves taking possession of some immovable property to be taken or retained.

Registration of JDA

For the terms of Section 45(5A) to be applicable, the Joint Development Agreement must be signed by both parties, registered and executed with payment of stamp duty.

Specified Agreement

Section 45(5A) requires both parties to enter into a specified agreement for the section to be enforceable. The term ‘specified agreement’ refers to a JDA made by an owner with a developer or builder for the development of a project in exchange for a share in the developed project, with or without monetary payment.

The gains the landowner makes by receiving flats or developed land through a JDA are taxable as capital gains under Section 45(5A). The owner has to pay income taxes in the year in which the whole or part of the project or building is completed, and the completion certificate is issued.

However, if they sell or transfer the project before its completion and issuance of the completion certificate, they are liable to pay capital gains tax in the year of the transfer. Taxes will apply to the full value consideration received, which includes the stamp value of their share of the land or building or both and monetary compensation received from the developer.

Capital gains taxation under Section 45(5A) of the IT Act in India depends on the following aspects:

• Full Value of Consideration: The compensation received or to be received by a seller of a capital asset is called the full value of consideration (FVC). For real estate u/s 45(5A), FVC is the stamp value of the landowner’s share of property as of the date of completion and cash received from the developer, if any.
• Cost of Acquisition: This is the value for which the seller acquired the capital asset, i.e., the purchase price of the land. If you own the land for more than 2 years, you can offset losses from inflation by considering the indexed value of the land.
• Year of Taxability: This is the year in which the developer completes the project and issues a completion certificate, or the year of transfer in case you sell your share before project completion.

Formula for Calculation

Based on the above three factors, the following formula is used to calculate capital gains tax under Section 45(5A):

Full Value of Consideration = Stamp value of owner’s share + cash payment received - indexed cost of acquisition

Where,

• indexed cost of acquisition (COA) = Purchase price x (CII of the year of transfer/CII of the year of purchase
• CII = cost inflation index of a particular financial year as notified by the Central Government

Example of Calculation

Mr. A bought a plot of land for ₹10 lakhs in April 2005. In 2021, he entered into a contract with XYZ Builders Pvt. Ltd., which involved the following terms:

• He would receive a single flat upon completion of the project.
• He will receive ₹50 lakhs in cash upon handing over ownership of the rest of the plot to XYZ Builders Pvt. Ltd.

The project construction was completed in September 2023, and the completion certificate was issued in August 2024. The taxable consideration includes the stamp duty value of the flat on the date of completion, which was ₹40,00,000.

COA = ₹10,00,000 x (CII of FY2024-2025/CII of FY2005-06) = ₹10,00,000 x (363/117) = ₹31,02,564 (approx.)

Long-term capital gains (LTCG) subject to taxation = FVC - COA = ₹50 lakhs + ₹40 lakhs - ₹31,02,564 = ₹58,97,436

Read Also: How to Calculate Income Tax on Salary

Before Section 45(5A) was introduced, tax laws required landowners in Joint Development Agreements 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 out of their own pocket 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 2017. 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.

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.

Just as JDAs are used to secure development projects, a medical insurance plan secures healthcare and medical emergency expenses for you and your loved ones. By purchasing health insurance online, you can ensure financial protection, as you are covered against hospitalisation expenses, daycare treatment, ambulance charges, global charges, and more.

At TATA AIG, we offer diverse health plans catering to different medical coverage needs. If you are over the age of 61 years or want to cover your elderly parents, our senior citizen health insurance plan provides a sum insured of up to 25 lakhs* and specialised features like home physiotherapy, wellness services and preventive health checkups.