Development Agreement Tax implication for the Landlord
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 Rs5000 Per sqr.yrd.Hence the total consideration of transfer on 2nd-Jan-2015 is Rs30,00,000.Now after indexation the Capital gains are Rs 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 Rs 25 Lakhs in REC bonds/Purchase a new flat for Rs 25 Lakhs/Invest Rs 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 Rs20,00,000. Hence he made a Long term capital gain of Rs80,00,000 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 Rs80Lakhs correct?While filing income tax for AY2016-17 he has to show Rs80 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 Rs 50Lakhs in REC bonds and Purchase a flat for Rs55 Lakhs assuming landlord deposited the earlier capital gains of Rs25 Lakhs in Capital Gains account.Can he purchase more than one flat with Rs 55 Lakhs or only one flat?
- Assume he invested Rs 25 lakhs of earlier Capital gains in REC bonds.Is it possible to invest additional Rs50 lakhs in REC bonds as both these capital gains arised in different AY’s?
- Can we reduce the Long term capital gains of earlier Rs 25 lakhs from Rs 80 Lakhs and assume Long term capital gains from sale of flats as Rs55 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