Taxability of Capital Gain on Sale of Agricultural Land

Taxability of Capital Gain on Sale of Agricultural Land

Sale of agricultural land is liable to tax except for rural agriculture land, as the rural agriculture is not considered as a capital asset and there is no question of capital gain tax. Agricultural Land is a land on which agricultural activities are being carried out. Such agricultural land may be situated either in a rural area or in a Non-Rural area. The distinction of agricultural land is very important as the tax implication is different in both the cases. In addition, the understanding of difference between Agriculture land situated in Rural Area and in Non-rural area is also very important to understand the Taxability of Capital Gain on Sale of Agricultural Land

Capital Gains Tax on Sale of Agricultural Land in Rural Area

As per the Income Tax Act, the Rural Agricultural Land has been exclusively excluded from the definition of Capital Asset. Rural Agricultural Land is not a Capital Asset; hence the Income Tax as Capital Gain Tax on the sale of such rural agricultural land won’t be levied, irrespective of the amount involved in the transaction, no capital gain would be levied on the sale of rural agricultural land.

There is a confusion which arises here is that which land to consider as Rural Land and which to consider as Non-Rural agricultural Land. To get rid of this dilemma, the government has given a specific definition to differentiate between Rural agricultural Land and Non-Rural agricultural Land.

As per the definition provide by the government, the following land is to be considered as rural agriculture land and is not a capital asset:

1. Where the agricultural land situated in an area within the jurisdiction of the municipality or where the population is less than ten thousand.
2. Where distance of the agricultural land from municipality and population limit is as under:

Capital Gains Tax on transfer of Non-Rural Agricultural Land

An Agricultural Land located in Non-rural i.e. in an urban Area would be recognized as a Capital Asset and would attract Capital Gains Tax on the sale of such urban Agricultural.

The Tax on the transfer or sale of urban agricultural land would be computed in the similar manner as is in the case of another capital asset. The Acquisition cost of the agriculture land and Cost of Improvement (if any) would be deducted from the Sale consideration to calculate (short/long term) the Capital Gains.

Section 54B: Capital Gains Exemption on Sale of Agricultural Land

As already mentioned above, no capital gain tax on sale or transfer of agricultural land situated in a rural area as the same is not considered as a capital asset as per the provisions contained in Income Tax Act. However, exemption from the capital gain can be claimed on the sale of urban agricultural land under section 54B for investment in another agricultural land. The investment in other agricultural land either may be either in Rural agricultural Land or Non-Rural Agricultural Land.

Conditions to be satisfied to claim exemption under section 54B:

1. The Exemption available U/s 54B of the IT Act is can be claimed by an Individual or by HUF only.
2. The Agricultural land transferred must be a capital asset. The Non-rural or urban agricultural land may be a long term or a short term capital asset.
3. The Non-Rural or Urban agricultural land must be used by the assessee or by his parents for the purpose of agricultural activities for a period not less than 2 years immediately preceding the date of transfer. In case the assessee is an HUF, the land can be used by the members of the HUF.
4. The assessee should acquire another agricultural land within 2 years from the date of sale or transfer of previously agricultural land.
5. Where the assessee fails to purchase the agricultural land on or before the due date of the filing of the return, the amount of Capital Gains should be deposited in the Capital Gains Account Scheme. Such deposited amount can be withdrawn at the time of acquiring the agricultural land.

Other important points

The new agricultural land so acquired shall not be transferred within a period of 3 years from the date of acquisition; if such acquired land is transferred within 3 years of acquisition then the capital gain tax allowed as exemption earlier would be withdrawn.

The assessee can claim exemption U/s 54B by reinvesting the proceeds from the sale of the agricultural land in specified bonds, the assessee also can claim exemption U/s 54F for reinvestment in a Residential House.

Also Read- Taxability of Capital Gains