Our apartment is being redeveloped on a JV basis with a builder. For the current flat of 990 sq ft, we are getting a flat of 1,400 sq ft, goodwill amount of ₹7 lakh and monthly rental reimbursement of ₹25,000 till completion of the project.
Please clarify the tax aspects on the above components of the agreement.
K. Vidyadhar
Taxability as per Section 45(5A) Income Tax Act 1961- Capital Gains on Joint Development Agreement (JDA)
Since you are transferring your existing flat (990 sq ft) in exchange for a larger flat (1,400 sq ft) along with monetary consideration of ₹7 lakh and rental reimbursement of ₹25,000 per month until completion, capital gains tax implications will arise. It is presumed that the existing flat is a long-term capital asset (held for more than 24 months).
Point of Taxation
· Under Section 45(5A) of the Income Tax Act, 1961 (the Act), capital gains from a JDA are taxable in the year in which the completion certificate is issued for the project, either for the entire project or a specific part of it.
· This would, therefore, mean that you do not have to pay capital gains tax in the year of signing the agreement and the capital gains tax will be payable when the completion certificate is issued by the competent authority. I would also like to believe that the builder would hand over the possession of new flat to you.
Computation of capital gains
Exemption under Section 54 of the Act – Reinvestment in Residential Property
To save capital gains tax, you can claim an exemption under Section 54 of the Act, if you meet the following conditions:
Eligible Investment: Since you are receiving a residential flat (1,400 sq ft) in exchange for your old flat, this is considered as reinvestment in a new residential property.
Conditions for Exemption: The property must be constructed within three years after the date of transfer of old flat (900 sq. ft).
The new property must be held for at least three years from the date of possession.
Value of Exemption: Stamp duty value of the new flat (1,400 sq ft) on the date of certificate of completion.
The author is a practising chartered accountant
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