This section deals with the taxation of capital gains arising from Joint Development Agreements (JDA). It applies only to individuals and Hindu Undivided Families (HUFs).

Bare Act Extract – Section 45(5A):

“In the case of an assessee being an individual or a Hindu undivided family, the capital gain arising from the transfer of a capital asset, being land or building or both, under a specified agreement shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority…”

How is Capital Gain Calculated?

Capital gain will be calculated in the year in which the completion certificate is issued, not when the agreement is made.

🔹 Full Value of Consideration (FVC):

The stamp duty value (SDV) of the share of constructed property received by you + any monetary consideration received from the builder.

🔹 Less: Indexed Cost of Acquisition (ICOA):

The cost of the land (acquired or inherited) indexed as per Cost Inflation Index (CII).

🔹 Capital Gain = FVC – ICOA

Conditions to Apply Section 45(5A):

1. Transfer is made under a registered development agreement.

2. Applicable only to Individuals and HUFs.

3. Completion certificate is issued by the competent authority.

Important Notes:

• If you sell your share in the project before completion, Section 45(5A) will not apply. In such cases, capital gain is taxed in the year of transfer under general provisions.

• If you received advance payments, TDS @10% under Section 194-IC is applicable on monetary consideration.

✅ User-Friendly Example:

Suppose you own a plot and enter into a JDA in FY 2024-25. The builder agrees to give you 3 flats + ₹20 lakhs. The completion certificate is issued in FY 2026-27. The SDV of 3 flats is ₹1.5 crore.

Let’s assume:

• Indexed cost of land = ₹40 lakhs

Capital Gain = (₹1.5 crore + ₹20 lakhs) – ₹40 lakhs = ₹1.3 crore
This ₹1.3 crore is your Long-Term Capital Gain, taxable in FY 2026-27 (AY 2027-28)

A slump sale refers to the transfer of one or more undertakings as a going concern, for a lump sum consideration, without assigning individual values to the assets and liabilities transferred. This definition is given under Section 2(42C) of the Income Tax Act, 1961.

🧮 How to Compute Capital Gains on a Slump Sale (Section 50B)

Under Section 50B, the capital gain arising from a slump sale is calculated using this formula:

Capital Gain = Sale Consideration – Net Worth of the Undertaking

• Sale Consideration: Total amount received or receivable for the transfer.

• Net Worth: Treated as the cost of acquisition and improvement. It is calculated as:

  Net Worth = Aggregate Value of Total Assets – Value of Liabilities

Important Points While Computing Net Worth:

• Depreciable assets: Consider Written Down Value (WDV) as per Income Tax records.

• Assets under Section 35AD: Their value is considered NIL.

• Other assets: Taken at book value.

• Liabilities: Taken at book value.

• Revaluation of assets, if any, is to be ignored for this purpose.

📅 Nature of Capital Gains

• If the undertaking is held for more than 36 months → Long-Term Capital Gain (LTCG)

• If held for 36 months or less → Short-Term Capital Gain (STCG)

💡 Tax Treatment

• Indexation benefit is not allowed under Section 50B.

• Tax Rates:

  • LTCG: Taxed at 20% (plus surcharge & cess).

  • STCG: Taxed at applicable slab rates.

• The gain is taxable in the year in which the slump sale takes place.

📋 Filing Requirement

The seller (assessee) is required to obtain a report from a Chartered Accountant certifying the computation of net worth and submit it in Form 3CEA along with the return of income.

Under Section 17(2)(vi) of the Income-tax Act, 1961:

“Value of any specified security or sweat equity shares allotted or transferred by the employer to the employee either free of cost or at concessional rate” is treated as perquisite, taxable as income under the head ‘Salaries’ in the year of exercise.

Valuation Rule (Rule 3(8)):

For listed shares → FMV on date of exercise on stock exchange
For unlisted shares → FMV as per merchant banker’s valuation on date of exercise

In a company liquidation, the distribution of assets to shareholders is treated as the “transfer” or “realization” of the capital asset (i.e. the shares held). Although the process of winding up is distinct from a typical share sale, the Income-tax Act, 1961 treats the receipt of assets on liquidation in a manner similar to a sale or exchange.

Relevant Sections and Concepts:

1. Capital Asset and Transfer:

   • Section 2(14) of the Act defines “capital asset” without any qualification on the mode of holding. Shares, irrespective of the holding mode, are treated as capital assets.

   • Section 45 and Section 48 set out the framework for computing capital gains on the transfer of a capital asset. In a liquidation, the distribution is considered as full or partial consideration received in exchange for the shares.

2. Computation of Capital Gains on Liquidation:

   • Full Value of Consideration:
     In liquidation, the “consideration” is the aggregate of the assets distributed (which may be in cash or kind) by the company to the shareholder.

   • Cost of Acquisition:
     The cost of acquisition of the shares is that which was initially paid (or deemed to have been paid) on acquiring those shares.

     Section 48 specifies that capital gain is the difference between the “full value of the consideration received” and the “cost of acquisition (plus any expenses on transfer).”

3. Holding Period and Nature of Gain:

   • Under Section 2(42A), the holding period of shares is considered from the date of purchase to the date of liquidation distribution.

   • Depending on whether the holding period meets the thresholds (more than 12 months for listed shares or more than 24 months for unlisted shares), the resulting gain will be classified as either short-term or long-term. This classification determines the applicable tax rates.

Step-by-Step Computation Method:

Step 1: Determine the Total Consideration Received

The total consideration is the aggregate market value of all assets (cash and non-cash) received by the shareholder in the liquidation process.

Example: If you receive cash of ₹80,000 and assets (e.g., property, investments) valued at ₹20,000, the total consideration is ₹1,00,000.

Step 2: Ascertain the Cost of Acquisition

This is the original amount paid (or the deemed cost) for the shares acquired in the company.

Example: Suppose your cost of acquisition for these shares was ₹70,000.

Step 3: Compute the Capital Gain

Using the formula from Section 48:

Capital Gain = (Total Consideration Received) – (Cost of Acquisition + Expenses on Transfer)
If there are no additional transfer expenses: Capital Gain = ₹1,00,000 – ₹70,000 = ₹30,000

Step 4: Adjust for Holding Period and Tax Rates

• For Listed Shares:

  • Long-Term Capital Gains (LTCG) apply if the shares are held for more than 12 months.

  • Short-Term Capital Gains (STCG) apply if held for 12 months or less.

• For Unlisted Shares:

  • The holding period threshold is 24 months.

Indexation benefits (if applicable) may be considered in the case of long-term capital gains, thereby adjusting the cost of acquisition to reflect inflation.