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

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)

What is the Taxability of Agricultural Land in India?

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.

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

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.

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)

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.

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.