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How to save tax on Capital Gains arising from the Sale of Agricultural Land

Updated on: 12 Apr, 2024 03:38 PM

Are your parents planning to sell agricultural land or do you want to sell the land which you inherited? Well, along with the joy of earning comes the fear of taxes. But does the capital gain on sale of agricultural land attract taxes? land is a capital asset. A and, when you sell this Capital Asset, the resulting profits are called Capital Gains. The taxability when you sell agricultural land can be exempted from income tax, or it may not. This guide will help you understand the provisions related to the taxability of the profits on the sale of agricultural land.

What is an Agricultural Land?

There are two types of Agricultural land

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

Definition of 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)

Shortest distance from the jurisdiction of a municipality Population Type of Agriculture Land Shortest distance from the jurisdiction of a municipality Population Type of Agriculture Land
Within the municipality Less than 10,000 Rural land Within the municipality More than 10,000 Urban land
More than 2 Kms >10,000 upto 1,00,000 Rural land upto 2 Kms >10,000 upto 1,00,000 Urban land
More than 6 Kms >1,00,000 upto 10,00,000 Rural land upto 6 Kms >1,00,000 upto 10,00,000 Urban land
More than 8 Kms >10,00,000 Rural land upto 8 Kms >10,00,000 Urban land

What is the Taxability of Agricultural Land?

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 2 years, 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 2 years, the gain arising is termed short-term capital gain.
  3. Long-term capital gain shall be taxable at 20%, 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.

How to compute capital Gain on the sale of urban Agriculture land?

Particular Amount
Full value of the consideration (FVOC) XXX
Less:- Expenses incurred in connection with the transfer (XXX)
Net Consideration XXX
Less:-index Cost of Acquisition/Cost of Acquisition (XXX)
Less:- index Cost of Improvement /Cost of Improvement (XXX)
Long-term/short-term Capital Gain/Loss XXX

Exemptions on capital gains on the Sale of urban agricultural land

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.


How to compute 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.


What is a Rural Agricultural Land?

Agricultural land in rural areas is defined by the following conditions:

(a) It is situated within a municipality with a population of fewer than 10,000.

(b) It is located outside the municipality and meets the following criteria:

  • Positioned at a distance greater than 2 km from the local boundaries of a municipality with a population exceeding 10,000 but not exceeding 100,000.
  • Positioned at a distance greater than 6 km from the local boundaries of a municipality with a population exceeding 100,000 but not exceeding 1,000,000.
  • Positioned at a distance greater than 8 km from the local boundaries of a municipality with a population exceeding 1,000,000.

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 a CA from tax2win to help you maximize your deduction.

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.

Consequences:

  • Where the amount deposited in the capital gains accounts scheme is not utilized for the purchase of the agricultural land within a specified period, then the amount not so utilized shall be charged as capital gains of the previous year in which the period of 2 years from the date of transfer of the original asset expires.
  • Where the new agricultural land is transferred within a period of 3 years of its purchase, then the capital gains which was exempt earlier shall be reduced from the cost of the new agricultural land for the purpose of computation of capital gains in respect of the new agricultural land, and it will be short term / long term on the basis of period of holding.
  • On the other hand, if the agricultural land acquired by the assessee is rural agricultural land, there will be no capital gain even if it is sold within a period of 3 years because rural agricultural land is not a ‘capital asset.’

TDS on Sale of Agricultural Land?

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.

Whether the sale of agricultural land is subject to tax under capital gains or not depends on various factors and provisions. If you are someone who feels intimidated thinking about taxes and wants a smooth ITR filing experience, fret not. File your ITR on your own or hire an eCA from tax2win to ensure an accurate and timely e-filing experience.

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Frequently Asked Questions

Q- What is the exemption u/s 54 B?

Section 54B provides an exemption of capital gain arising on the sale of urban agriculture land (Long-term / short-term).


Q- Whether capital gain on the sale of rural agricultural land arise?

Rural agriculture land is not a capital asset hence no capital gains arise on the sale of rural agriculture land.


Q- What if agricultural land is situated outside India?

Agricultural land situated outside India is always a capital asset. Agricultural income earned from land outside India is subject to taxation in India. If the activity is conducted as a business, it falls under the category of 'Income from Profits and Gains of Business or Profession'. Otherwise, it is classified as 'Income from Other Sources'.


Q- Can you reinvest capital gains to avoid taxes in India?

Section 54 of the Act allows individuals or Hindu Undivided Families (HUFs) to reduce their tax liability by reinvesting capital gains in a single residential property.


Q- What is the TDS on sale of agricultural land above 50 lakhs?

The TDS on the sale of agricultural land for land having a value exceeding Rs.50 lakhs is 1%.


Q- Is the sale of agricultural land a capital gain?

According to Section 45 of the Income-tax Act, 1961, agricultural land in rural areas in India is not classified as a capital asset. Consequently, any profits from its sale are not subject to taxation under the category of 'Capital Gains'.


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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.in. 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.