How to save tax on Capital Gains on Sale of Agricultural Land

The Indian agricultural land is the backbone of the economy, providing employment to many persons and producing food to feed the nation. Agricultural land means land upon which agricultural activities are carried out. It may be situated in a rural area or situated in a non-rural area. 

Capital Gain Exemptions on Sale of Agricultural Land

In some cases, when you sell Agricultural Land – it may be entirely exempt from income tax, or it may not be taxed under the head capital gains. Let’s take a look at what are the exemptions available for capital gains on the sale of agricultural land:

• Agricultural land in rural areas in India is not considered a capital asset. Therefore any gains from its sale are not taxable under the head Capital Gains. 
• If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business & Profession. Thus, no capital gains will be applicable on such agricultural lands.
• Under Section 10(37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of urban agricultural land is exempt from tax.

Conditions you need to meet under section 54B for claiming exemption from capital gains

If the agricultural land is in a non-rural area, capital gains tax exemption can be claimed under Section 54B of the Income Tax Act when the following conditions are fulfilled:

• The exemption is available to an Individual or a HUF.
• The land which is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for a period of 2 years immediately before the date of transfer.
• Another land for the agricultural purpose should be purchased within a period of 2 years from the date of transfer of this land.
• The new agricultural land which is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase.
• In case you are not able to purchase agricultural land before the date of furnishing of your Income Tax Return – the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount which is deposited.
• If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land – it shall be treated as the capital gain of the year in which the period of 2 years from the date of sale of land expires. Of course, in this case, you can withdraw these amounts for any use you may want.

Amount of Exemption

• If the cost of the new agricultural land purchased is more than the number of capital gains, entire capital gains are exempt.
• If the cost of the new agricultural land purchased is less than the number of capital gains, Capital Gains less cost of the new agricultural land = capital gains chargeable to tax

Disclosure of Agricultural Land Sale in ITR

Profits from the transfer or sale of agricultural land are not included in income for tax purposes and need not be disclosed in the income tax return. Agricultural income is considered an exempt income and should be disclosed in the income tax return to calculate the average tax rate. Profits made from the sale of agricultural land that is not a capital asset need not be disclosed in the income tax return.

TDS Applicable for Sale of Agricultural Land

Tax Deducted at Source (TDS) at 1% should be deducted on the sale or purchase of transactions involving the sale of property where the transaction value exceeds Rs.50 Lakhs. However, Section 194IA for TDS on the property is not applicable on the sale or purchase of agricultural land even when the transaction value exceeds Rs. 50 lakhs.

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