Real estate deals in India are evolving, especially when landowners enter into Joint Development Agreements (JDAs) with builders. But what about taxes? That’s where Section 45(5A) of the Income Tax Act comes into play.
This section was introduced to address a particular yet increasingly common situation — where an individual or Hindu Undivided Family (HUF) gives a property to a builder for development &, in return, receives a portion of the built-up area and sometimes cash. However, earlier, tax authorities used to treat it as if the land was “sold” immediately, which meant tax had to be paid even before the landowner received anything in hand.
That was unfair. So, Section 45(5A) was inserted to fix this.
What is Section 45(5A) of the Income Tax Act?
Section 45(5A) deals with capital gains arising from the transfer of land or building (or both) under a registered Joint Development Agreement.
Earlier, the capital gains tax was triggered at the time of signing the agreement, creating cash flow issues for landowners. But with this amendment, the tax liability is now postponed — capital gains are taxed in the year in which the project is completed or the certificate of completion is issued.
Key Highlights of Section 45(5A)
Here’s what the section says in simple terms:
- It applies only to individuals or HUFs.
- The land/building must be transferred under a registered Joint Development Agreement.
- The capital gains tax will be levied in the year in which the completion certificate for the project is issued by the competent authority.
- The full value of consideration = Stamp duty value of landowner's share in the project any monetary consideration received.
- Any advance money forfeited shall also be treated as income.
Example to Understand Section 45(5A)
Let’s say Mr. Sharma, an individual, owns a piece of land. He enters into a JDA with ABC Developers in FY 2023–24. Under the deal:
- Mr. Sharma will get 4 flats out of the total 20 built on his land.
- He also receives ₹50 lakh in cash.
- The project completion certificate is issued in FY 2026–27.
Under Section 45(5A), the capital gains for Mr. Sharma will be taxed in FY 2026–27, not at the time of signing the agreement. This gives him time to receive the flats & the money before paying tax.
Tax Calculation Under Section 45(5A)
Here’s how to calculate capital gains in this case:
- Full Value of Consideration = Stamp duty value of the flats Mr. Sharma receives (as on date of the completion certificate) ₹50 lakh.
- Less: Indexed cost of acquisition of the land.
- The result is the Capital Gain, which will be taxed in the year of project completion.
Real Estate and Charitable Trusts
While Section 45(5A) applies specifically to individuals & HUFs, charitable trusts entering into property development arrangements must be cautious too.
The Income Tax Act defines specified persons under Section 13(3), especially in cases where there are transactions by charitable trusts with specified persons (such as founders, trustees, or relatives). If a charitable trust enters into a real estate agreement with such a specified person & the deal is not at arm’s length, exemptions under Sections 11 and 12 may be denied.
So, charitable trusts must structure their JDAs professionally & disclose all dealings transparently, especially when they involve related or specified persons.
Important Points to Remember
- Section 45(5A) gives relief to landowners who otherwise had to pay tax without receiving income or possession.
- It is applicable only if the JDA is registered.
- If the landowner transfers their share before the project is completed, then Section 45(5A) doesn’t apply, & the capital gain is taxed in the year of transfer.
- The section does not apply to companies, partnerships, LLPs, etc.
- The landowner still needs to file ITR in the relevant assessment year even if tax is not immediately applicable.
Final Thoughts
Section 45(5A) is a much-needed breather for small landowners venturing into JDAs with big developers. It balances the timing of tax liability with the actual receipt of income, making real estate deals more transparent and manageable.
💼 Planning to enter into a property development agreement or unsure how to handle capital gains on real estate? Our experts at Callmyca.com simplify complex tax laws and help you file without stress. Schedule a quick consult & secure your compliance today!
