Taxation of Agricultural Land

Taxation of sale of Agricultural Land in India

In some cases, when a non-resident sells Agricultural Land – it may be entirely exempt from income tax.

Agricultural land in Rural Area in India is not considered a capital asset and hence any gains from its sale are not taxable under the head Capital Gains.

Rural area is defined as any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more. Also, it should not fall within an aerial distance as given below of the local body with the following population thresholds as per the last census.

2 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is between 10,000 to 1 lakh
6 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is between 1 lakh to 10 lakhs
8 kms from local limit of municipality or cantonment boardIf the population of the municipality/cantonment board is more than 10 lakh

If the agricultural land falls outside the above said rural area, then the same is considered as a capital asset and the gains on the sale of such agricultural land are taxable as long term or short term depending on the period of holding. Hence, it is not whether the said land is used for agricultural land alone is relevant for determining the said gain is taxable but its location with respect to the above-said jurisdictions is also relevant to determine its taxability.

While calculating the capital gains, in addition to the cost of acquisition (or indexed cost of acquisition in the case of a long term asset), expenditure incurred in connection with such transfer are also deductible and following expenses can be considered as incurred for the purpose of such transfer:

a. Brokerage or commission paid for finding a buyer

b. Cost of stamp papers

c. Travelling expenses in connection with the transfer

d. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor etc.

Further, under Section 10(37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of urban agricultural land (outside the rural area) is also exempt from tax.

Long Term Capital Asset

Agricultural land not situated in rural areas as referred above shall be considered as a long-term capital asset if the period of holding is more than 24 months and if it is held for 24 months or less shall be considered as a short-term capital asset.

Further in the case of an asset acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short-term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.

Applicable Tax Rates for Capital Gains on sale of Agricultural Land

Type of TaxTax Rate Applicable
Long-term capital gains tax20%
Short-term capital gains taxThe short-term capital gain is added to the other taxable income and the taxpayer is taxed at applicable tax slabs.

Exemption on Capital Gains From Transfer of Land Used for Agricultural Purposes – Section 54B

When the asset transferred is a land used for agricultural purposes by an individual or the individual’s parents or Hindu Undivided Family (HUF) for 2 years before the sale, the capital gain is invested in the purchase of new agricultural land then such capital gain shall be exempt under section 54B.

The exempted amount under section 54B shall be the amount of investment in new agricultural land or capital gain derived, whichever is lower. The newly acquired agricultural land should not be sold within a period of 3 years from the date of its purchase.

In case the assessee is not able to purchase agricultural land before the date of furnishing of your income tax return, such capital gain shall be deposited in an account in any bank for claiming the exemption for reinvestment. The assessee shall be entitled to withdraw such amount towards the reinvestment from the said bank account. Any amount not so utilised shall be charged to tax as the income of the year in which the period of three years from the date of the transfer of the original asset expires.

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