Development Agreement Tax implication for the Landlord

[Raghav Kumar]

Hi All,

I have a set of queries on tax implications for landlord when he enters a development agreement with a builder. At a high level the queries can be classified as below:

• At what instance the capital gain arises when the GPA is transferred to the builder for his share on the date of registration of the development agreement. Note: The consideration here is builder will construct ten flats on the land at his cost and will give the landlord four flats as his share. When does the capital gain arise?
• Is it on the date of registration?(In this case the capital gain is not realized by the landlord as the construction is yet to start and no money was received) (or) When the constructed flats are handed over to landlord by builder? (or) When landlord’s share of flats are sold to buyers?

How to arrive at the actual Long term Capital Gains?

I will illustrate my understanding with an example. Please correct me if am wrong.

Assume the land is of 1000 sqr.yrds.Builder will be constructing ten flats at his cost in that land. Landlords share is four flats and builders share is six flats i.e. 40:60 ratio(Landlord : Builder).Landlord and Builder have registered the development agreement on 2nd-Jan-2015.As per terms the Landlord gives a GPA for 600 sqr yards of land which would go to builder for consideration of constructing all flats at his cost.Now the Long term capital gain has arised on the 600sqr yards of land as landlord has transferred the GPA to builder even though there was no monetary consideration. Hence while filing tax for AY 2015-16 he has to show capital gains. Now as the future consideration for transferring 600sq.yards to builder cannot be assumed at this point,as per section 50D the Registrar value of that land has to be considered for Capital gain.Assume Registrar value is ₹ 5000 Per sqr.yrd.Hence the total consideration of transfer on 2nd-Jan-2015 is ₹ 30,00,000.Now after indexation the Capital gains are ₹ 25,00,000.Is my understanding correct in arriving at capital gains as mentioned above?Hence before filing income tax returns for AY2015-16 he has to either invest ₹ 25 Lakhs in REC bonds/Purchase a new flat for ₹ 25 Lakhs/Invest ₹ 25 Lakhs in Capital gains account to buy a flat within next 2 years.

Now assume four flats were handed over to the landlord on 1st-Dec-2015 and all the four flats were sold to buyers as the construction was in progress. These flats were sold on different dates between 1st-July-2015 to 25th-Nov-2015.The sale price of each flat is ₹ 20,00,000. Hence he made a Long term capital gain of ₹ 80,00,000 lakhs by selling four flats as there is no indexation benefit in this case.Is my understanding correct here?Is it a Long term Capital Gains?Is the amount for consideration ₹ 80Lakhs correct?While filing income tax for AY2016-17 he has to show ₹ 80 Lakhs as capital gains. Hence before filing income tax returns for AY2016-17 he has to do one of the following to avoid capital gains tax:

• Invest ₹ 50Lakhs in REC bonds and Purchase a flat for ₹ 55 Lakhs assuming landlord deposited the earlier capital gains of ₹ 25 Lakhs in Capital Gains account.Can he purchase more than one flat with ₹ 55 Lakhs or only one flat?
• Assume he invested ₹ 25 lakhs of earlier Capital gains in REC bonds.Is it possible to invest additional ₹ 50 lakhs in REC bonds as both these capital gains arised in different AY’s?
• Can we reduce the Long term capital gains of earlier ₹ 25 lakhs from ₹ 80 Lakhs and assume Long term capital gains from sale of flats as ₹ 55 Lakhs, as it would be redundant as we have already showed the capital gains for the transfer of land to builder?

Can you also suggest me if I have missed something and answer my queries or confirm if my understanding is correct. Thanks in advance for your valuable time and suggestions

Thanks & Regards

Raghav

AI Summary

Landlord Seeks Clarity on Capital Gains Timing in Development Agreement: Registration, Receipt, or Sale of Flats? A landlord queries about tax implications when entering a development agreement with a builder. The agreement involves the builder constructing ten flats, with four allotted to the landlord. The landlord seeks clarity on when capital gains arise: upon registration of the agreement, upon receiving the flats, or upon selling the flats. The landlord illustrates potential capital gains calculations and queries about investments to mitigate tax liabilities. The response suggests consulting a professional for detailed advice.