Taxability of Capital Gain Tax under JDA

1. Exemption under Section 54 or 54F for Two Flats You Intend to Stay In

• 
  Section 54: Provides exemption on long-term capital gains if the gains are invested in the purchase or construction of a residential house property. Since you intend to stay in two flats and have no other residential property in your name, you can claim exemption under Section 54, provided:

  • The flats are treated as a single residential unit. Some courts have allowed exemption for two flats if they are contiguous or part of the same development project.
  • If the flats are considered separate units, you may claim exemption only for one flat unless they are treated as a composite residential property.

• 
  Section 54F: Also allows exemption for investment in a residential property. However, since you are receiving consideration in the form of flats and cash, Section 54F may not apply, as it is for scenarios where the consideration is solely in kind (land exchanged for residential property).

2. Effect of the Developer Taking More than 3 Years on Exemption

• Under Section 54, the exemption is allowed if the residential house property is constructed within 3 years from the date of transfer.
• Since the JDA was signed in F.Y. 2020-21 and the Completion Certificate will be obtained in F.Y. 2024-25, the construction has taken more than 3 years. Technically, this may disqualify the exemption, as per a literal interpretation of the law.
• However, certain courts have ruled that delays beyond the control of the assessee (e.g., developer delays) should not penalize the taxpayer. You might need to justify the delay if queried by tax authorities.

3. Calculation of Capital Gains if Stamp Duty Value of Each Flat is Rs. 40 Lakh

The capital gains will be calculated as follows:

1. 
   Fair Market Value (FMV) as of 2009: Since the property was gifted in 2009, its FMV at the time of the gift (Rs. 46,59,537) will be treated as the cost of acquisition.
2. 
   Indexed Cost of Acquisition:

   • Use the Cost Inflation Index (CII) for 2009-10 and 2024-25: Indexed Cost=FMV in 2009×CII of 2024-25CII of 2009-10\text{Indexed Cost} = \text{FMV in 2009} \times \frac{\text{CII of 2024-25}}{\text{CII of 2009-10}}Indexed Cost=FMV in 2009×CII of 2009-10CII of 2024-25​
     

3. 
   Full Value of Consideration:

   • Total consideration = 4 Flats (Rs. 40 Lakh each, as per stamp duty value) + Rs. 20 Lakh (cash received).
   • Total = $(4\times 40)+20=Rs.1.6Crore+Rs.20Lakh=Rs.1.8Crore$.

4. 
   Capital Gains: $$\text{Capital Gain}=\text{Full Value of Consideration}-\text{Indexed Cost of Acquisition}$$
   

You can claim exemption under Section 54 for the portion of the capital gains reinvested in your two residential flats.

4. Taxation on Sale of the Other Two Flats

• The holding period for determining STCG or LTCG starts from the date of completion of the project (i.e., the date of the Completion Certificate in F.Y. 2024-25).
• Since you intend to sell the two flats in the same financial year as the Completion Certificate:

  • The holding period will be less than 36 months, and the gains will qualify as Short-Term Capital Gains (STCG).
  • STCG is taxable at the slab rates applicable to you.

Key Points to Keep in Mind

1. Maintain all documentation related to the JDA, Completion Certificate, and sale agreements for future reference.
2. If any litigation arises over the applicability of exemptions due to delays, consult a tax professional for guidance.
3. Consider the impact of selling two flats on your overall tax liability for F.Y. 2024-25. Tax planning can help optimize this.

1. Exemption under Section 54 or Section 54F for Two Flats

• 
  Section 54 (Residential Property Replacement):

  • If you reinvest in a residential house property, you can claim exemption for two flats under Section 54, provided they are treated as a single residential unit.
  • Since you plan to stay in both flats, you are eligible for exemption for those flats.
  • 
    Condition: You should not own any other residential property on the date of transfer and should not sell the flats within three years.

• 
  Section 54F (If Land is Treated as Capital Asset):

  • If the land qualifies as a long-term capital asset, you can reinvest the capital gain in one residential house property (or two flats as per recent amendments, if treated as a single unit).

2. Impact of 3+ Years for Completion on Exemption

• For Section 54/54F exemption, the new property must be:

  • Purchased within 2 years from the date of transfer or
  • Constructed within 3 years from the date of transfer.

• Issue: Since the developer took more than three years to complete the project, there is a risk of exemption being disallowed. However, courts have held in some cases (e.g., K. Ramachandra Rao v. CIT) that delays beyond the taxpayer’s control should not negate the exemption.

• Recommendation: Retain evidence showing the delay was caused by the developer, not by you.

3. Capital Gains Calculation

• Date of Transfer: Under a JDA, the "transfer" is deemed to occur when the Development Agreement is registered (FY 2020–21 in your case), per Section 2(47) of the Income Tax Act.

• Sale Consideration:

  • The sale consideration is the stamp duty value of your share of the developed property on the date of the JDA.
  • If the stamp duty value of each flat at the date of the completion certificate is ₹40 lakh, then your total consideration is:

    • ₹40 lakh × 4 flats = ₹160 lakh
    • Add ₹20 lakh forfeit money received from the developer.
    • Total Sale Consideration: ₹180 lakh.

• Cost of Acquisition:

  • Land Cost (Gift from Aunt):

    • The cost will be the cost of acquisition of the donor (your aunt), indexed from the year she acquired it (2006).
    • Cost of Land = ₹3 lakh.
    • Indexed Cost (FY 2020–21) = ₹3 lakh × (301/122) = ₹7.41 lakh.

• Capital Gain:

  • 
    Total Sale Consideration: ₹180 lakh.
  • 
    Less Indexed Cost: ₹7.41 lakh.
  • 
    Net Capital Gain: ₹172.59 lakh.

4. Sale of Remaining Two Flats

• 
  Short-Term or Long-Term Capital Gain:

  • If you sell the other two flats in the same financial year as the possession (FY 2024–25), the holding period is counted from the date of possession.
  • Flats sold immediately after possession will attract Short-Term Capital Gains (STCG) taxed at applicable slab rates.
  • If you sell after 24 months, the gains qualify as Long-Term Capital Gains (LTCG) taxed at 20% with indexation.

Summary of Key Points

1. 
   Exemption under Section 54/54F:

   • You can claim for two flats, provided you meet the conditions and the delay is justified.

2. 
   3+ Years Delay:

   • May pose a risk to exemption but can be defended with proper documentation.

3. 
   Capital Gains:

   • Deemed transfer occurred in FY 2020–21, and sale consideration is based on stamp duty value of ₹180 lakh.

4. 
   Sale of Flats:

   • Immediate sale leads to STCG; holding for over 24 months leads to LTCG.

Recommendations:

• Maintain all records of delays caused by the developer for exemption eligibility.
• Consult a CA for accurate calculations and compliance.
• If selling flats, consider timing to minimize tax liability.

For personalized advice, consider a phone consultancy. Hope you find this helpful. If you could spare two minutes to write a review, it would be greatly appreciated. Thank you!

Assumption:

In the year 2006, you and your “aunt” were assessed for the gift of immoveable property (capital asset) and the cost of acquisition for the above referred property for you is assumed to be Rs. 46,59,537/- and the date of acquisition is the year 2006.

 

Q-1:

No exemption shall be available u/s 54 since the capital asset transferred was not a “residential house”.

 

For claiming exemption u/s 54F, since the ‘Cost of Acquisition” for the two flats received by you is already assessed as per the “Stamp Duty” value of the two flats and Capital Gains has been/ shall be assessed on the same as per the standard formula (i.e. Stamp Duty Value Less Cost of Acquisition from Aunt), the value of two flats which are opted for “own use” should be available for exemption u/s 54F.

 

However, the important point to be noted here is that u/s 54F, investment in more than 1 residential property is not allowed and also is not allowed to anybody who already owns more than 1 residential property on the date of transfer of such capital asset.

 

In your case, since you don’t own any other residential property on the date of transfer, first condition is satisfied. For the second condition i.e. investment in more than 1 residential property seems ambiguous.

 

What the law says is that the assessee must not own more than 1 residential property “on the date of transfer of capital asset” and also should not invest in more than 1 residential property not only on the date of transfer of capital asset but also not within 2 years (for purchase) and not within 3 years (for construction).

 

As such, second condition is not fully applicable to you and can also be challenged by the department owing to the fact that you happen to invest in more than 1 residential property from the sale consideration of the capital asset within 2/3 years.

 

However, you can also submit the argument that Sec.54F allows assessee to own 1 residential property (for own use) and also invest in 1 additional residential property within 2/3 years.

 

Though the above argument shall be subject to satisfaction of AO/ Other forum.

 

To summarise the answer above:

1. 54 is not applicable at all.
2. 54F is partially allowed for 1 flat (without challenge) but for 2nd Flat, it is subject to litigation.

 

Q-2:

Date of execution of JDA is irrelevant for these types of transactions. The date of transfer of capital asset shall be considered from the date of receipt of completion certificate from the competent authority. Date of acquisition of capital asset in your case shall be considered from the date of gift i.e. the year 2006.

 

Hence, it will be clearly a Long Term Capital Gains without any doubt and will not impact application of Sec.54F (Sec.54 is not applicable).

 

Q-3:

Assuming you are allowed benefit of only 1 flat u/s 54F, Long Term Capital Gains shall be calculated as below:

 

Full Value of Consideration shall be Rs. 100 Lakhs (40 Lakhs x 2) and Rs. 20 Lakhs received in Cash.

 

Cost of acquisition shall be calculated by applying indexation benefit on Rs. 46,59,537/- from the year 2006 (or fair market value as may be applicable under income tax laws).

 

Benefit of Rs. 40 Lakhs shall be allowed as exemption for 1 flat kept for own use.

 

For precise calculation, more details would be required.

 

Q-4:

If you sale both flats in the same financial year, the LTCG shall be calculated as per Ans-3 only but without any benefit u/s 54F i.e. Rs. 100 Lakhs as reduced by indexed benefit of Rs. 46.59 Lakhs.