Capital Gain on sale of Agricultural Land – Tax Exemptions
Tax exemptions are available on capital gain on sale of agricultural land under various sections of Income Tax Act. Tax exemptions would depend on the type of holding, type of land and type of transfer. Let us look at it in detail.
Sale of Agricultural Land held as stock-in-trade
Agricultural land can either be held as an investment or stock in trade. If the land is held as stock in trade to generate income from trading of land then the income is taxable and no exemption is provided under Income Tax Act.
Difference between trading and investing can be determined by
1. Period of holding of land
2. Frequency of transactions
3. Treatment of assets in books of accounts etc.
Income tax on land held for trading purposes also acts as a deterrent for speculation.
Sale of Land held as Investment
If the agricultural land is held for investment, first it must be determined whether the land is treated as a capital asset or not.
As per section 2(14) of IT Act, a capital asset does not include rural agricultural land.
What is Rural Agricultural Land?
Definition of Rural Agricultural Land under section 2(14) has undergone some change with effect from 1 April 2014.
Prior to 1 Apr 1014, following definition for Rural Agricultural Land shall apply:
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 as per the last preceding census report, or
b) an area located within 8 kilometers from the local limits of any municipality or cantonment board
After 1 Apr 2014, following definition for Rural Agricultural Land shall apply:
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 two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
- not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
- not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.
For the purpose of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year
What is Urban Agricultural Land?
An agricultural land which is located within the limits as defined in sub-clauses a) and b) of Section 2 (14) (iii) and as stated above can be called as “urban agricultural land”.
Rural Agricultural Land – Non Taxable
Since rural agricultural land is not a capital asset, there is no question of capital gain and hence any amount you receive from the sale of rural agricultural is not taxable.
Capital Gain on Sale of Agricultural Land
Urban Agricultural Land is treated as a capital asset and hence any capital gain from the sale of such land is taxable. However, tax exemptions are available under various sections of IT Act.
Tax Exemption on Compulsory Acquisition of Agricultural Land U/S 10(37)
As per section 10(37), following income is not included in total income of an assessee (an individual or a Hindu undivided family) – any income chargeable under the head “Capital gains” arising from the transfer of agricultural land, where—
(i) such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2 i.e. urban agricultural land;
(ii) such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such individual or his parent or Hindu undivided family (HUF);
(iii) 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;
(iv) such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.
Tax Exemption under Section 54B on sale of Agricultural Land
Any urban agricultural land is a capital asset and hence any capital gain from the sale of such land is taxable. However, an individual or Hindu Undivided Family (HUF) can avail tax exemption under section 54B of IT Act. Under Section 54B, capital gain that results from the sale of agricultural land (original asset) is exempted from tax provided that
- The land was being used by the individual or his parents or HUF for agricultural purposes for atleast last 2 years immediately preceding the date on which the land was transferred, and
- The long term capital gain is invested by the assessee in another land (new asset) for being used for agricultural purposes, within 2 years after the date of transfer of original asset
Check out details of exemption under Section 54B of Income Tax Act.
Tax Exemption available under Section 54F
You can also claim tax exemption under section 54F on long term capital gain on sale of agricultural land by investing entire net consideration in
- Purchase of one residential house property within 1 year before or 2 years after the sale of agricultural land or
- Construction of one residential house property within 3 years after the sale of agricultural land
Check out details of exemption under Section 54F of Income Tax Act.
Tax Exemption available under Section 54EC
Another option of claiming tax exemption on long term capital gain from sale of agricultural land is by investing capital gain amount in specified bonds of National Highway Authority of India and Rural Electrification Corporation (REC) within 6 months after the sale of agricultural land. The total investment made in specified asset in the financial year in which original asset was sold and the subsequent financial year, should not exceed Rs. 50 lakh rupees.
Check out more details of exemption here – Section 54EC of Income Tax Act
Capital Gain Account Scheme
If you are not able to make investment in the financial year in which you sold your agricultural land, you can utilize Capital Gain Account Scheme (CGAS) under which you can deposit your long term capital gain amount in a special capital gain account available at many PSU Banks. Amount deposited in CGAS account is not taxable upto 3 years, depending on the type of investment you plan to make.
Check out details on capital gain account in our detailed guide on Capital Gain Account Scheme.
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