Compulsory Acquisition of Land – Tax Exemption Rules

Do you own a plot of land which is notified by government for compulsory acquisition for a project? Do you know the tax implications? Tax on capital gain from compulsory acquisition of land depends on the type of land that is being acquired and type of its ownership. In this article, we explain to you various tax exemptions that you can avail in the case of compulsory acquisition of land.

Before we discuss various exemptions available, first we need to understand definitions of rural agricultural land and urban agricultural land as per IT Act.

Rural agricultural land can be defined as any agricultural land in India which is not situated in

a) an area within the jurisdiction of a municipality or a cantonment board and which has a population of more than 10,000, or

b) an area within the distance, measured aerially –

  • not being more than 2km, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding 1 lakh; or
  • not being more than 6km, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 1 lakh but not exceeding 10 lakh; or
  • not being more than 8km, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10 lakh.

Agricultural land that is situated within the limits as defined in a) and b) above can be referred to as urban agricultural land.

capital-gain-on-compulsory-acquisition-of-land

Compulsory Acquisition of Land – Tax Exemptions

Compulsory Acquisition of Rural Agricultural Land

Rural agricultural land is not considered as a capital asset. Hence, capital gain and capital gain tax are not applicable to any income from compulsory acquisition of rural land.

Compulsory Acquisition of Urban Agricultural Land

Capital gain from compulsory acquisition of urban agricultural land is exempted under section 10(37), provided that

  • such land was being used for agricultural purposes for last 2 years immediately preceding the date of transfer, by the individual or his parent or by HUF as the case may be,
  • such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India,
  • such income has arisen from the compensation or consideration for such transfer received by the assessee on or after the 1st April 2004

Compulsory Acquisition of other land

Any capital gain that arises from compulsory acquisition of any other type of land such as residential plot, commercial land etc. is treated as normal capital gain on sale of land. You can check out tax exemptions available on sale of land here – Capital Gain on Sale of Land.

Compulsory Acquisition of Land or Building belonging to Industrial Undertaking

Section 54D provides tax exemption on capital gain from compulsory acquisition of land or building belonging to an industrial undertaking, provided that

  1. The assessee (industrial undertaking) should have used the land or building for the purpose of its business for minimum 2 years immediately preceding the date of transfer, and
  2. The assessee should purchase another land or building or any right in any other land or building within 3 years from the date of transfer of original asset, for the purpose of shifting or re-establishing the said industrial undertaking.

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Team AY is the editorial team of AssetYogi led by Mukul Malik. A small group of Real Estate enthusiasts, Team AY works hard everyday on a vision of making high quality Real Estate knowledge freely available.

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