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

About agricultural land

There are two types of Agriculture land

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

1. Rural Agricultural land

• (a). If situated in any area which 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 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 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 local limits of municipality and which has a population of more than 10,00,000.

2. Urban Agricultural land:
Any agricultural land which does not fulfill the criteria of Rural agriculture land (Refer above condition for better understanding)

What is the taxability of agricultural land?

• A 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. Nature of capital gains long-term or short term will depend upon the no. of years asset is held by the assessee.
  2. If the period of holding is more than 2 years, then the capital gain 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.

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

Exemptions on capital gains on the Sale of urban agricultural land

• Urban agricultural land is a capital asset but any capital gain 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 on the sale of urban agricultural land & such capital gain is used for another agricultural land.
• 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.

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 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.

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.’