A small change in the Tax law could pose serious hurdles to the Joint Development model which has been a very popular mode for development of residential housing in the land-scarce urban areas.

A typical Joint Development model involves Transfer of a residential house by the land Owner to a Developer, who would convert the property into a residential complex and settle the consideration largely in form of allotment of developed residential apartments to the Owner, in a pre-determined ratio.

Under the current tax scenario, the land Owners could claim that there is no capital gains tax implication on the transaction since the sale consideration is reinvested in housing units and therefore exemption under Section 54 of the Income-tax act is applicable. This position has also received judicial approval and the Department’s stand that the intent of the law is to limit the exemption to a single residential unit has been negatived by Tax Tribunals and Courts.

The Budget 2014 now seeks to expressly restrict the exemption to a single residential unit, leaving the land owner exposed to capital gains taxation on the consideration representing the remaining residential units.

While most builders have been enthusiastic about the budget proposal on account of the increase in the interest deduction limit and consequent expectation of greater propensity for investment in housing, many have missed the point that in the current market scenario where a significant portion of buyers are ‘investors’, the limitation on Capital Gains exemption would be a deterrent to those investors who bank on the capital gains exemption for their housing investments.

Land owners contemplating a Joint Development model would be well advised to be on their guard and factor the tax consequences and plan the transaction bearing in mind the tax impacts under the revised regime, since the capital gains tax bill would be on their account – not developers.