How to Save Tax on Capital Gains on Sale of Agricultural Land

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What is an Agricultural Land?

There are two types of Agricultural land -

Now, it is very important to understand the meaning of Rural Agricultural land and Urban Agricultural land in India.

Definition of Rural Agricultural Land

(a). If situated in any area that is comprised within the jurisdiction of a municipality and its population is less than 10,000, or

(b). If situated outside the limits of the municipality, then situated at a distance measured-

1. more than 2 km from the local limits of the municipality and which has a population of more than 10,000 but not exceeding 1,00,000
2. more than 6 km from the local limits of the municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000
3. more than 8 km from the local limits of the municipality and has a population of more than 10,00,000.

Definition of Urban Agricultural Land

Any agricultural land that does not fulfill the criteria of Rural agriculture land (Refer above condition for better understanding)

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Agricultural Land Taxable in India? Know the Rules & Exemptions

Rural agricultural land does not qualify to be a capital asset. Hence no capital gains/losses arise on the sale or transfer of rural agricultural land.

Urban agricultural land qualifies as a capital asset; hence, capital gains shall arise on the sale or transfer of urban agricultural land.

1. The nature of capital gains, long-term or short term will depend upon the no. of years the asset is held by the assessee.
2. If the period of holding is more than 24 months, then the capital gain on sale of agricultural land arising will be termed as a long-term capital gain. If the holding period is shorter than 24 months, the gain arising is termed short-term capital gain.
3. Long-term capital gain shall be taxable at 20% (with indexation) and 12.5% (without indexation), whereas short-term capital gain is chargeable at slab rate.
4. If you are engaged in the purchase and sale of agricultural land in the normal course of your business, then the gains from its sale are not considered capital gains and are taxed under the head business or profession.

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Key Changes introduced in ITR forms for (AY) 2025–26

• Inclusion of Long-Term Capital Gains (LTCG) in ITR-1 and ITR-4
  Previously, taxpayers with any LTCG were required to file more complex forms like ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or equity mutual funds under Section 112A can file using the simpler ITR-1 (Sahaj) or ITR-4 (Sugam) forms, provided there are no carried forward losses.
• Segregation of Capital Gains Based on Transaction Date
  The updated ITR forms now require taxpayers to report capital gains separately for transactions executed before and after July 23, 2024. This change aligns with the revised capital gains tax rules introduced in the Union Budget 2024, which, among other things, reduced the LTCG tax on real estate to 12.5% without indexation from the previous 20% with indexation.
• Reporting of Buyback Proceeds as Deemed Dividends
  From October 1, 2024, proceeds received from the buyback of shares by domestic listed companies are to be treated as deemed dividends. The updated ITR forms require these proceeds to be reported under 'Income from Other Sources.' Additionally, the capital gains schedule should reflect zero sale proceeds, allowing the cost of acquisition to be claimed as a capital loss, which can be carried forward for up to eight assessment years.
• Enhanced Capital Gains Reporting in ITR-7
  For trusts, NGOs, and other institutions filing ITR-7, there is now a requirement to disclose capital gains separately for transactions before and after July 23, 2024. This change ensures accurate tax calculations in light of the revised capital gains tax rules.
• Increased Threshold for Asset and Liability Reporting
  In the ITR-2 form, the threshold for mandatory reporting of assets and liabilities has been raised to ₹1 crore. This adjustment aims to reduce the compliance burden for taxpayers with assets below this threshold.

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Best Ways to Save Tax on Capital Gains from Agricultural Land Sales

1. Claim Agricultural Income Exemption
   If the land was used for farming for at least two years prior to sale, you can classify the proceeds as agricultural income under Section 10(1) of the Income Tax Act. Such income is entirely exempt from tax.
2. Choose Between Indexation and Non-Indexation Methods
   For property acquired before 23rd July 2024, you can calculate Long-Term Capital Gains (LTCG) using:
   • 12.5% tax without indexation, or
   • 20% tax with indexation benefit.
     Compare both methods and opt for the one that minimizes your tax outgo.
3. Reinvest in Agricultural Land or Farmhouses
   By reinvesting the sale proceeds into agricultural land or a farmhouse within two years, you can claim exemptions under Section 54B.
4. Classify as Business Income
   If the land is bought and sold as part of a business, the profits are treated as business income instead of capital gains, potentially lowering your tax rate depending on your income and deductions.
5. Use Gains to Purchase Residential Property
   Investing the sale proceeds in residential property can provide relief under Section 54F, provided:
   • The property is purchased within 1 year before or 2 years after the sale.
   • It is held for at least 3 years to retain the exemption.
6. Invest in Capital Gains Bonds
   Under Section 54EC, you can invest capital gains in specified bonds within six months of the sale. Holding these bonds for five years qualifies you for a tax exemption.
7. Optimize with Joint Ownership
   Selling jointly-owned agricultural land allows each co-owner to claim individual exemptions, effectively reducing the overall tax burden.
8. Leverage State-Specific Incentives
   Some states in India offer exemptions or incentives for agricultural land transactions. Check your local regulations for additional benefits.
9. Plan the Sale Strategically
   Timing your sale during a year with lower overall income can help reduce the applicable tax rate on gains. Structuring the transaction terms to include tax-efficient clauses also helps.
10. Explore Agricultural Projects or Startups
    Reinvesting in agricultural projects or startups can unlock tax deductions or exemptions under various government initiatives aimed at promoting agriculture.
11. Consult a Tax Advisor
    A tax advisor, can tailor strategies to your situation. Their expertise ensures that you take full advantage of tax exemptions and deductions.

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LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison

Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.

Taxation for mutual funds

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Exemptions on Capital Gains on the Sale of Urban Agricultural Land in India

Urban agricultural land is a capital asset, but any capital gain on the sale of agricultural land arising from the compulsory acquisition of such land shall be exempt as per Section 10(37) if certain conditions mentioned in that section are satisfied.

The exemption u/s 54B is available regarding capital gains arising from the transfer of agricultural land. This exemption is available when capital gain arises from the sale of urban agricultural land. The exemption under section 54B is available only to individuals and HUFs.

If you are into buying and selling land regularly or in the course of your business, i.e., if you hold agricultural land as stock in trade, then in such a case, any gains from its sale are taxable under the head Business & Profession, i.e., no capital gains shall be chargeable on such agricultural land.

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Who is Eligible for Capital Gains Exemptions on Agricultural Land Sales?

• The taxpayer must be an individual or HUF. Companies, LLPs, and firms cannot avail of this exemption.
• The taxpayer must sell agricultural land classified as either:
  • A Long-Term Capital Asset (land held for more than 24 months), or
  • A Short-Term Capital Asset (land held for 24 months or less).
• The agricultural land sold must have been used for agricultural purposes for at least two years prior to the transfer by the individual, their parent, or the HUF, as applicable.
• The taxpayer must purchase new agricultural land within two years of selling the old land.
• The new agricultural land must be located in India.

Note: In the case of compulsory acquisition, the period of acquisition of new agricultural land will be determined from the date of receiving the compensation and not from the date of compulsory acquisition.

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How to Calculate Capital Gain on the Sale of Rural Agriculture Land?

Rural agricultural land is not considered a capital asset. Therefore, any transfer or sale of such agricultural rural land is not subject to any capital gain tax.

However, you still need to disclose the capital gain from the sale of agricultural land while filing your ITR under schedule Exempt Income.

The capital gain on the sale of agricultural land can be computed as follows -

Capital Gains = Sale price - (Cost of Acquisition + Cost of Improvement)

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What are the Conditions to Claim Exemption u/s 54B?

• The first condition is that urban agricultural land needs to be transferred.
• The eligible assessee – Individual & HUF
• Such land must have been used for agricultural purposes by the individual or his parents, or HUF in the 2 years immediately preceding the date of transfer.
• Assessee shall purchase another agricultural land within two years from the date of transfer.
• Assessee can deposit the amount of capital gain from sale of agricultural land under CGAS if the investment is not made before the filing of the income tax return.
• The amount utilized by the assessee for the purchase of a new asset and the amount so deposited shall be deemed the cost of the new asset.
• Assessee shall purchase another agricultural land (urban or rural) within 2 years from the date of transfer.
• If the assessee sells the new land purchased within 3 years, then the exemption is withdrawn, and the taxpayer has to pay tax on sale of agricultural land

Make sure you avail of all the possible exemptions at the time of ITR filing. You can also hire an online CA from Tax2win to help you maximize your deduction.

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Comprehensive Overview of Section 54B of the Income Tax Act

The amount of exemption u/s 54B shall be the lower of the following:

• Amount of capital gains arising on the transfer of agricultural land or
• Investment in a new agricultural land or the amount deposited in the Capital Gains Deposit Account Scheme.

For example:- If you sold agricultural land in April, 2019 for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December 2019, you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income tax calculation for AY 2019-20 in your hand would be calculated as follows:

(*) Exemption under section 54B will be lower of the following:

• Amount of capital gains arising on transfer of agricultural land, i.e., Rs. 8,40,000; or
• Investment in new agricultural land, i.e., Rs. 5,00,000.

Thus, the exemption will be of Rs. 5,00,000.

Also, if a taxpayer purchases a new agricultural land just to claim exemption u/s 54B and subsequently transfers the new piece of land within 3 years from the date of its acquisition, then the benefit granted under section 54B will be withdrawn.

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What is the Quantum of Exemption Allowed u/s 54B?

If the cost of new agricultural land<= capital gains, entire capital gains are exempt.

If the cost of new agricultural land < capital gains, capital gains to the extent of the cost of new agricultural land is exempt.

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TDS Rules for Selling Agricultural Land – What You Need to Know

Individuals have to deduct TDS @1% on the sale/purchase transactions of real estate property if the transaction value is more than Rs.50,00,000.

Also, the TDS rates mentioned under section 194IA are not applicable for sale/purchase transactions even if the value exceeds Rs.50 lakhs.

The tax on capital gain on sale of agricultural land depends on various factors and legal provisions. However, understanding capital gains taxes might seem overwhelming. If you are also among those who break out in a cold sweat just hearing about taxes, worry not! Tax2win’s got you covered.

From planning your taxes to helping you maximize your tax savings by claiming all potential deductions, and exemptions, Tax2win’s experts ensure a hassle-free and smooth ITR filing journey. Book an online CA Now!

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