A JDA outlines the terms of the partnership, from construction specifications to unit distribution and project timelines. Once finalized, the builder assumes responsibility for securing permits and commencing construction.

Transfer of land possession: A crucial tax event

Consider the case of Mr A, who bought a house in Delhi on 15 April 1998, for ₹20 lakh and entered into a JDA with a local builder on 5 June 2021. The agreement stipulated that the builder would construct four flats, three of which would belong to Mr A, with the builder retaining one. The builder would also find buyers for two of Mr A's flats. Additionally, the builder agreed to pay ₹20 lakh to Mr A upon signing the JDA, and to complete the project within three years after signing the JDA.

What will Mr A's tax liability be, and when will it come due?

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The timing of the land possession transfer is critical for tax purposes. Previously, the signing of the JDA would have triggered the transfer of land possession to the builder, leading to immediate capital gains tax liability for the landowner. This posed a problem, as landowners were taxed before the project had even begun.

This issue was addressed with the introduction of Section 45(5A) of the Income Tax Act, 1961, effective 1 April 2017. Under this section, landowners or HUFs (Hindu undivided family) entering a registered JDA with a builder are required to pay capital gains tax in the year the project receives its completion certificate from the relevant authority. Thus, the land possession is deemed to occur only when the project is complete.

In Mr A's scenario, the project receives its completion certificate on 31 May 2024, and the stamp duty value of the reconstructed flats is ₹1 crore each. With Mr A set to receive one flat valued at ₹1 crore, sales proceeds of ₹2 crore from two flats, and the ₹20 lakh advance, his total consideration amounts to ₹3.20 crore.

To calculate his capital gains, Mr A would need to determine the fair market value of his property as of 1 April 2001, which is ₹50 lakh. This amount, indexed to the 2024-25 fiscal year, results in a cost of acquisition of ₹1.81 crore. Applying the long-term capital gains tax rate of 20%, Mr A faces a tax liability of ₹27.70 lakh before considering surcharge and cess.

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"Owners can take the benefit of section 54 in JDAs in which sales proceeds of one flat can be adjusted against the purchase price of another as per fair market value of one flat. Section 54F benefit can also be availed if the owner has earned capital gains from any other asset class. The date of completion certificate will be considered for capital gains tax liability in the hand of the owner and also the capital gain reinvestment date to avail of these benefits," explained Sachin Saxena, a New Delhi-based chartered accountant.

Additional payments and GST implications

It's important to note that TDS will be deducted from the ₹20 lakh advance payment.

"The tax under Section 194-IC shall be deducted at the rate of 10% of the amount paid or payable under the agreement. No tax shall be deducted under this provision from the consideration paid in kind," said Naveen Wadhwa, vice president, research and advisory, Taxmann. The TDS amount deducted on the advance payment can be carried forward while filing the ITR every year till the capital gain is charged to tax, he said.

If Mr A also receives a regular monthly allowance for the inconvenience of relocating during construction, this amount, referred to as hardship money, is treated as a capital receipt and is not taxable under Section 45(5A). Additionally, no TDS is deducted on this amount, Saxena added.

Should the project be delayed and the completion certificate is issued on 31 December 2024, Mr A's tax liability would only arise after the certificate is issued.

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From a GST perspective, JDAs involve two key transactions: the transfer of development rights from the landowner to the developer and the construction services provided by the developer to the landowner.

"Each of these transactions or supplies is subject to tax under GST," said Karishma Malhan, manager, research and advisory, at Taxmann.

However, the obligation to pay GST falls solely on the developer.

"The GST law places the responsibility of paying GST on the developer through a mechanism called reverse charge. The landowner is specifically exempt from paying GST on these services. The tax must be paid before the completion certificate is issued, based on the fair market value as per the law, which is reduced by one-third to account for the land's value. The applicable GST rate for this transfer is 18%," Malhan explained.

Similarly, GST on construction services is payable before the completion certificate is issued. "It is calculated on the total amount charged for construction services, minus one-third of the land value. GST rates vary depending on the type of construction project; for affordable residential apartments under RERA, the rate is 1.5%, while for non-affordable residential apartments, it is 7.5%," said Malhan.

Affordable residential apartments are defined as those with a carpet area not exceeding 60 sq. m in metropolitan cities or 90 sq. m in other cities, with a consideration of below ₹45 lakh.

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If the landowner sells their unit while it's still under construction, GST is payable on the sales value and any advance payment received from the buyer. "Such sales value is reduced by one-third to account for the land's value and is taxed at 1.5% or 7.5% depending upon the type of project," she added.