Capital Gain on Agricultural Land
Agriculture is the backbone of the Indian economy, providing employment to many and producing food to feed the nation. Agricultural land refers to land used for agricultural activities. From an income tax perspective, agricultural land is classified into two types:
Rural Agricultural Land
Definition:
Rural Agricultural Land in India is defined as:
It means an agricultural land in India –
(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-
(i) 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; or
(ii) 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; or
(iii) more than 8 km from the local limits of the municipality and which has a population of more than 10,00,000.
Urban Agricultural Land
Any agricultural land that does not meet the criteria for rural agricultural land is considered urban agricultural land.
Capital Gain on Sale of Agricultural Land
Rural Agricultural Land:
- Non-taxable: Agricultural land in rural areas is not considered a capital asset under Section 45 of the Income-tax Act, 1961. Therefore, gains from its sale are not taxable under ‘Capital Gains’.
- Condition: Agricultural operations must be carried out to claim this exemption.
- Business Income: If the land is stock in trade or part of a business involving the buying and selling of rural agricultural land, it is considered business income and is taxable.
Urban Agricultural Land:
- Taxable: Urban agricultural land is considered a capital asset.
- Long-term capital gain: Holding period greater than 2 years, taxed at 20% after considering the indexation benefit.
- Short-term capital gain: Holding period less than 2 years, taxed at slab rates.
Exemptions on Sale of Urban Agricultural Land
Section 10(37):
Capital gains on compensation received from the compulsory acquisition of urban agricultural land are exempt from tax. This should be declared under Schedule EI in the income tax return.
- Conditions:
- The land should be urban agricultural land.
- It should have been used for agricultural operations in the preceding 2 years before the transfer.
- The transfer must be under compulsory acquisition approved by the Central Government or RBI.
Section 54B:
Exemption can be claimed on the purchase of another agricultural land if:
- The exemption is available to an individual or HUF.
- The land sold must have been used for agricultural purposes by the individual, their parents, or HUF for 2 years immediately before the transfer.
- Another agricultural land must be purchased within 2 years from the date of transfer.
- The new agricultural land should not be sold within 3 years from its purchase.
- If the agricultural land is not purchased before the income tax return filing date, the capital gains amount must be deposited in a public sector bank or IDBI Bank as per the Capital Gains Account Scheme, 1988.
- If the deposited amount is not used for purchasing agricultural land, it will be treated as capital gain after 2 years from the sale date.
Amount of Exemption
- Full exemption: If the cost of the new agricultural land is more than the capital gains.
- Partial exemption: If the cost of the new agricultural land is less, the remaining capital gains are taxable.
Disclosure in Income Tax Return (ITR)
Rural Agricultural Land:
- Gains from the sale of rural agricultu ral land are non-taxable and need not be disclosed in the income tax return. However, income from agricultural land is exempt under Section 10(1) and should be disclosed in Schedule EI of the ITR.
Urban Agricultural Land:
- The sale of urban agricultural land must be disclosed in Schedule CG in the ITR. You can deduct the indexed cost of acquisition and improvement from the sale value. Exemptions under Sections 54B, 54EC, and 54F can also be claimed.
TDS on Sale of Agricultural Land
- Applicable: Tax Deducted at Source (TDS) at 1% should be deducted for property transactions exceeding Rs. 50 lakhs.
- Not Applicable: Section 194IA for TDS does not apply to the sale or purchase of agricultural land, regardless of the transaction value.
