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All You Need to Know About Taxation on Sales of Agricultural Land in 2021

Updated on: 10 Aug, 2023 04:08 PM

As India is primarily an agrarian economy, persons who make a living from agriculture are granted a variety of incentives and benefits. For instance, farmers in India are exempted from paying any tax on their income from agricultural land under the country’s income tax regulations.

However, this does not mean that no tax is levied on agricultural land. Only the agricultural income generated from agricultural lands is exempted from taxes under this law.

The owner of the land has to pay the taxes and thus, it is important to understand the differences and the laws related to taxations of such lands properly. The rules related to the taxation from the sales of the land are different.

In this blog, we discuss everything that you need to know about taxation on the sales of agricultural land have a look!

Classification of Agriculture Land In India

In India, there are two categories of agricultural land: rural and urban agricultural land, according to the Income Tax Act.

Both types of lands are considered different and any gains from the sales of these lands are taxed differently.

Let's look at these individually!

Rural Agriculture Land

In India, it is the land that is:

(a) Located within the jurisdiction of a municipality and has a population of less than 10,000.

(b) Located outside the municipality’s limits but:

  • Within a distance of I more than 2 kilometres from the municipality’s local limits and has a population of more than 10,000 but not exceeding 1,00,000.
  • Located outside the municipality’s jurisdiction but within a distance of more than 2 kilometres from the municipality’s local limits and has a population.
  • More than a distance of more than 8 kilometres from the municipality’s local limits and a population of more than 10,000 people.
    Distance from municipality Population
    Within 2 kilometres 10,000 to 1,00,000
    2 km to 6 km 1,00,000 to 10,00,000
    6 km to 8 km More than 10 lakhs

Urban Agricultural Land

The term “Urban Agricultural Land” refers to land that is used for agricultural purposes and is located in a specific place. It is not the same as rural land.

a.) If it is located within the authority of a municipality and has a population of up to 10,000 people.

b.) If located outside the municipality’s boundaries, then located at a distance measured in kilometres as:

  • Up to 2 kilometres beyond the municipality’s local limits and with a population of more than 10,000 but not more than 1,00,000 people.
  • Till 6 kilometres beyond the municipality’s local boundaries and with a population of more than 1,00,000 but not more than 10,00,000.
  • Up to 8 kilometres outside the municipality’s area of jurisdiction and with a population of more than 10,000 people.

Taxability of sale of Agricultural Land in India

Land sales can generate two types of revenue. If the land is held as a stock in trade, the money from its sale is considered business income. However, if the land is held as an investment, the income from its sale is considered as Capital Gain.

  • Taxation on Sales of Rural Agricultural Land
    As Rural Agricultural Land does not qualify as a capital asset, there are no capital gains or losses when it is sold or transferred. This means the sale of such land would result in no capital gain, regardless of the amount involved in the transaction.
  • Taxation on Urban Agricultural Land
    The tax on the transfer or sale of urban agricultural land would be calculated similarly to that of other capital assets.
    To compute (short/long term) Capital Gains, the acquisition cost of the land and any Cost of Improvement (if any) would be deducted from the sale consideration.
    The type of capital gain, such as long or short term, is determined by the number of years the asset has been held by the assessee. When the capital asset is held for more than two years, the capital gain is referred to as long-term capital gain.
    If you acquire and sell land regularly or in the duration of your business, i.e., if you hold agricultural land as stocks in trade, then in that situation, any gains from its sale are taxed under the heading Business & Profession. This also implies that no capital gains on such agricultural land will be charged.

Capital Gain Tax Exemptions

Under section 54B, there is a provision to claim capital gain exemption on the sale of urban agricultural land for investment in other agricultural lands. However, there are certain conditions that the claimant needs to satisfy, which are as follows:

  • Only an individual or a HUF can use the exemption offered under Section 54B of the IT Act.
  • The transferred agricultural land must be a capital asset.
  • For not less than 2 years immediately preceding the date of transfer, the assessee or his parents must have utilised the non-rural land for agricultural purposes. However, if the assessee is a HUF, the land may be used by the HUF’s members.
  • The amount of Capital Gains should be deposited in the Capital Gains Account Scheme if the assessee fails to purchase the land on or before the due date for filing the return. The money deposited can be withdrawn after such land is purchased.
  • The entire capital gains are exempted if the cost of new land is equal to or greater than the capital gains. Furthermore, if the cost of new land is less than the cost of capital gains, capital gains up to the cost of new agricultural land are tax-free.

These are the laws related to the sales of agricultural land in India. If you are facing difficulties in understanding the laws or computing your income tax on such lands, you can hire our experts at affordable prices.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.