Agricultural Land: Treatment of Tax on Sale and Capital Gains
Updated: 4 days ago
India's economy is based mostly on agriculture, and the country’s agricultural land plays a key role in its growth. The industry employs a large percentage of the country's workforce and produces enough food to feed the entire country. You will learn the significance of India's agricultural land and how it influences the nation's identity as you continue reading. Do you intend to sell your farmland? Gains made from selling a capital asset, such as real estate or land, are referred to as capital gains. However, specific tax laws in India must be considered while selling agricultural land. We will discuss the taxation of capital gains on the sale of agricultural land in India in this detailed guide.
Table of content
What is Agricultural Land?
In India, agricultural fields are classified according to their proximity to cities. Comprehending these differences is essential in order to develop relevant policies and actions that support agricultural progress in both rural and urban areas.
Rural agricultural land: It is separated into smaller categories according to demographics and distance from towns. It is first categorised based on population density and proximity to municipalities.
Urban Agricultural Land: This is governed by population density and distance from city boundaries, with different rules established for each particular situation.
What is Rural Agricultural Land?
A piece of agricultural land is considered rural:
(a)If located in any region under municipal control with a population of fewer than 10,000, or
(b)If located beyond the municipality's boundaries, then at a distance measured-
Greater than two kilometres from the municipality's local boundaries and with a population of at least 10,000 but not more than one million people
Greater than 6 kilometres outside the municipality's local boundaries and with a population of more than 1,000,000 but not more than 100,000
Is located more than 8 kilometres outside the municipality's borders and is home to more than 100,000 people.
What is Urban Agricultural Land?
Urban agriculture land is defined as agricultural land that is either
Located within a municipality or cantonment board that has a population of at least 10,000 people or
Located within a certain aerial distance from the range of populations as indicated below:
Capital Gain on Sale of Agricultural Land in Rural Areas
The Income-tax Act, 1961's section 45 does not classify agricultural land in rural India as a capital asset. As a result, any profits from its sale are not subject to capital gains tax.
This land is considered business income and will be subject to taxes if it is stock in trade or if you are in the business of purchasing and selling rural agricultural land.
Capital Gain on The Sale of Urban Agricultural Land
A capital asset is defined as land used for agriculture that is not rural but is urban. The following is the taxability of land used for urban agriculture:
Long-term capital gain: Tax at 20% will be assessed for holding periods longer than two years after the indexation advantage is taken into account. The tax is reduced from 20% to 12.5% as of July 23, 2024. However, the advantage of indexation that was previously offered on the sale of long-term assets has been removed. On the other hand, the government has offered taxpayers the choice to calculate taxes at 12.5% without indexation or 20% with indexation on land acquired before July 23, 2024.
Short-term capital gain: Tax at slab rates will be applied to holding periods shorter than two years. Any gains from the sale of agricultural land are taxable under the heading Business & Profession. This means that no capital gains are charged on such agricultural land, if you regularly buy and sell land or if you hold farming land as stock in trade.
Taxability of Agricultural Land in India
Land used for agriculture in rural areas is not considered a capital asset. Therefore, the sale or transfer of agricultural land in rural areas does not result in capital gains or losses. Urban agricultural land is a capital asset. Therefore, capital gains will be realised when it is sold or otherwise transferred.
The length of time the asset is held by the assessee will determine whether the gains are long-term or short-term.
The capital gain on the sale of agricultural land will be referred to as a long-term capital gain if the holding period exceeds two years. The gain is considered a short-term capital gain if the holding period is less than two years.
Capital gains over the long term are subject to a 20% tax, whereas gains over the short term are subject to a slab rate.
The proceeds from the sale of agricultural land are taxed under the head "business or profession" and are not regarded as capital gains if you buy and sell it regularly as part of your business.
Exemption on Sale of Agricultural Land under Section 54B
Agricultural land located in a rural area is expressly excluded from the definition of a capital asset. As a result, there will be no capital profits on its sale. The sale of agricultural land located in a non-rural area, as previously mentioned, will result in capital gains. However, investments which are made in agricultural land are not subjected to capital profits under Section 54B. It is possible for the newly acquired agricultural land to be non-rural or rural.
Conditions to Claim Exemption under Section 54B
The initial condition is the transfer of urban agricultural land.
The person and HUF who get qualified for assessment
The individual, his parents, or HUF must have used the land for agricultural purposes during the two years before the date of transfer.
Two years from the date of transfer, the assessee must buy another piece of agricultural property.
If the capital gain from the sale of agricultural land is not invested before the income tax return is filed, the assessee may deposit the money under CGAS.
The sum that is deposited and used by the assessee to buy a new asset together will be considered the new asset's cost.
The assessee has two years from the date of transfer to purchase another piece of agricultural land, whether it be rural or urban.
The exemption is removed and the taxpayer is required to pay tax on the sale of agricultural land if the assessee sells the newly acquired land within three years.
Amount of Exemption under Section 54B
The income from the sale of the old agricultural land or the capital gains from its lower cost determines the amount of exemption under Section 54B of the Income Tax Act. Here are some more guidelines about the exemption amount:
Capital gains of both the short and long terms are eligible for the exemption.
The new agricultural land can be purchased in the name of a spouse or child, in which case the exemption still applies.
The new agricultural land might be purchased in the same metropolitan area or in a different state than the previous agricultural land, and still qualify for the exemption.
Depending on your unique situation, a tax professional can help you establish the precise amount of exemption.
Sale of Urban Agricultural Land: Exemptions on Capital Gains
Urban agricultural land is a capital asset. However, if certain requirements outlined in Section 10(37) are met, any capital gain on the sale of agricultural land resulting from the forced acquisition of such land is excluded. Requirement to pursue exemption under Section 10(37):
The land is used for urban agriculture.
Two years prior to the transfer, the land in question had to be utilised for agricultural purposes.
Disclosure of Sale of Agricultural Land in Tax Return
Selling of Agricultural Land in Rural Areas: Gains from rural agricultural land are not taxable since the Income-tax Act does not classify it as a capital asset. Revenue from agricultural land is required to be reported in Schedule EI of the ITR and is exempt under Section 10(1). Selling of Agriculture Land in Urban Areas: Urban agricultural land can be defined as a capital asset, and sales of these assets must be reported in the ITR's Schedule CG. This sale value can be used to lower the Indexed cost of acquisition and improvement. Exemptions under Sections 54B, 54EC, and 54F may also be claimed when selling urban agricultural land.
Income Tax Applicable on Sale of Ancestral Agricultural Land
Capital gains tax is applicable when co-owners profit from the sale of ancestral agricultural land. The higher of the selling price and the stamp value are utilised to determine the taxable amount. The initial purchase price or the fair market value in 2001, whichever is higher, determines the acquisition cost. The amount of acquisition multiplied by the cost-inflation index for the year of sale determines the acquisition index cost. For instance, use the cost-inflation index for 2023 if the land is sold. Long-term capital gains are represented by the difference between the selling price and the indexed cost. These gains are subjected to a flat 20% rate of tax. However, you might theoretically avoid this tax on agricultural land by reinvesting the profits in a new home or bonds from NHAI or RECL, following the guidelines in Sections 54F and 54EC of the tax code.
TDS on Agricultural Land Sale
Individuals are obligated to deduct 1% TDS when the value of a real estate transaction surpasses 50 lakhs. It is important to remember that transactions involving the sale or purchase of land for farming are not subject to the TDS rate specified in Section 194IA. Hence, TDS on Property is not applied. This is even in situations when the transaction value for agricultural land exceeds Rs. 50 Lakhs.
Agricultural Income Calculator
The state government will impose taxes on an individual's agricultural income even while the federal government does not impose taxes on it. This is how agricultural income is calculated for taxes:
Calculate the total of your net agricultural revenue plus your total non-agricultural income.
Consider the total of your net agricultural income plus the exemption cap based on your age bracket.\
Your ultimate tax amount will be the difference between the amount obtained in stages 1 and 2.
You can use TaxBuddy’s agricultural income calculator to compute the taxable amount accurately.
Budget 2024 Updates
Indexation benefits on capital gains from the sale of long-term capital assets have been planned to be eliminated in the Budget 2024. Properties used to have their purchase prices modified for inflation, which decreased their taxable profits. Long-term capital gains on financial and non-financial assets are now subject to a 12.5% tax rate instead of the previous 20% rate. However, the long-term asset sale no longer benefits from indexation. Consequently, long-term asset sales made after July 23, 2024, will be subjected to 12.5% taxation without the advantage of indexation.
When selling assets acquired on or before April 1, 2001, individuals may still deduct the fair market value (FMV) from their acquisition costs. The Finance Bill 2024 amendment announced the return of indexation benefits for individuals and HUFs just for tax computation on immovable property acquired before July 23, 2024. Thus, individuals now have the option between a 12.5% tax rate without an indexation advantage and a 20% tax rate with an indexation benefit.
Final Word
It is essential to comprehend tax laws while dealing with the sale of agricultural land in India. Individuals and Hindu Undivided Families (HUFs) are eligible for exemptions under Section 54B, however, fulfilling certain requirements is essential. Moreover, take note that agricultural land is exempt from TDS regulations on property sales. You should seek the advice of specialists in navigating these restrictions. This helps you to guarantee a seamless and financially healthy land sale transaction.
FAQ
Q1. What is ‘rural agricultural land’ for capital gains tax calculation purposes?
The term "rural agricultural land" refers to land that is primarily used for agricultural purposes and is located outside of urban areas. Certain local rules and regulations may cause changes in the precise definition.
Q2. Are there exemptions available when selling agricultural land?
Yes, as long as specific conditions are met, sellers of rural agricultural land can profit from a capital gains tax exemption under Section 54B of the Income Tax Act.
Q3. Which conditions should be fulfilled for the exemption on the sale of rural agricultural land?
The seller must have owned the agricultural land for at least two years prior to the sale in order to qualify for the exemption under Section 54B. For the exemption to apply, the sale earnings also need to be reinvested within a certain amount of time in another parcel of rural agricultural property.
Q4. Are additional exemptions available for capital gains tax on agricultural land sales in India?
Sections 54F and 54EC of the Income Tax Act offer exemptions or reductions on the tax on capital profits resulting from the sale of particular types of asset, in addition to the Section 54B deduction.
Q5. How to calculate the capital gain on agricultural land sales?
The acquisition and improvement costs are deducted from the sale price to determine the capital gain on the sale of agricultural property. After that, the amount is liable to capital gains tax. It is computed at the applicable rate while accounting for the holding duration and other relevant factors.
Q6. What is the tax on selling urban agricultural land?
Urban agricultural land sales are subject to capital profits tax. It is 20% in the long run with indexation advantages. This has been reduced, effective July 23, 2024, from 20% to 12.5%. However, the advantage of indexation that was previously provided on the sale of long-term assets has been terminated. On the other hand, the government has offered taxpayers the choice to calculate taxes at 12.5% without indexation or 20% with indexation on land acquired before July 23, 2024. Additionally, you only temporarily held the land at the then-applicable slab rates.
Q7. Can I claim an exemption under section 54B?
Section 54B only allows for agricultural land that has been farmed for at least two years prior to sale to be exempt. You may be excluded if you acquired the land within two years after the transaction.
Q8. Will rural agricultural land be considered a capital asset?
Urban agricultural land is capable of being regarded as a capital asset, but rural agricultural land cannot.
Q9. Where to show the sale of rural agricultural land in income tax returns?
Gains from rural agricultural land are not taxable since the Income-tax Act does not classify it as a capital asset. Revenue from agricultural land is required to be reported in Schedule EI of the ITR and is exempt under Section 10(1).
Q10. Is the sale of agricultural land exempt under section 10?
Urban agricultural land is a capital asset. However, if certain requirements are met, any capital gain on the sale of agricultural land resulting from the forced acquisition of such land is exempt under Section 10(37).
Q11. What if agricultural land is situated outside India?
A capital asset is always agricultural land located outside of India. India taxes agricultural income derived from land outside of the country. The activity is classified as "Income from Profits and Gains of Business or Profession" if it is carried out as a business. 'Income from Other Sources' is the classification applied otherwise.
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