How to Save Tax on Capital Gains on Sale of Agricultural Land

Profit on sale of land often falls under the ambit of capital gains taxation. However, rural agricultural lands have a different tax treatment from normal sale transactions. Let us understand the tax saving strategies for sale of agricultural land in detail.  

Key Highlights

• Rural agricultural land is not considered as a capital asset, leading to nil capital gains tax.
• Sale of urban agricultural land is taxable, but eligible for exemption under section 54B.
• TDS is applicable under section 194-IA for sale of urban agricultural land.

What is Rural Agricultural Land?

The Income Tax Act classifies agricultural land as rural or urban based on its location and proximity to a municipality.

Rural Agriculture Land

It means an agricultural land in India – 

(a) If situated in any area that is comprised within the jurisdiction of a municipality and its population is less than 10,000, or 

(b) If situated outside the limits of the municipality, then situated at a distance measured- 

If the land is situated anywhere within those specified limits, it would be categorized as urban agricultural land and taxed accordingly. Land that qualifies as rural land is not treated as a capital asset, so no capital gains tax applies.

Urban Agricultural Land:

If the agricultural land does not satisfy the conditions of rural agricultural land, then it will be considered urban agricultural land. i.e., any land that is not rural agricultural land will be considered urban agricultural land. Sale of urban agricultural land is taxable under capital gains.

Capital Gain on Sale of Rural Agricultural Land

No capital gains tax is levied on the sale of rural agricultural land. As per Section 2(14)(iii) of the Income Tax Act, rural agricultural land is not treated as a capital asset. Therefore, any profit from selling rural agricultural land is completely exempt from capital gains tax.

Capital Gain on Sale of Urban Agricultural Land

Capital gains tax applies on the sale of urban agricultural land. Under the Income Tax Act, urban agricultural land is considered a capital asset, so any profit from its sale is taxable.

• Short-Term Capital Gain (STCG): If held for ≤ 2 years, gains are taxed as per your income tax slab.
• Long-Term Capital Gain (LTCG): If held for > 2 years, gains are taxed at 20% with indexation benefit. The taxpayer (resident individual) has an option to pay tax at 12.5% without indexation benefit.

Exemption for Urban Agricultural Land Under Section 54B

If your land is urban agricultural land, you can save tax by reinvesting the sales proceeds under Section 54B by fulfilling the following conditions:

• The land must have been used for agricultural purposes by you or your parents in the two years immediately before the sale.
• The capital gain must be reinvested in purchasing another agricultural land within 2 years.
• If not immediately reinvested, deposit the capital gains in a Capital Gains Account Scheme (CGAS) before the ITR filing deadline.

For Example: If you sold agricultural land for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. And you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income taxable in your hands would be calculated as follows:       

Disclosure of Agricultural Land Sale in ITR

Sale of Rural Agricultural Land 

Since Rural agricultural Land is not a capital asset as per the definition of the Income-tax Act, any gains arising from the same are not taxable. Income from agricultural land is exempt u/s 10(1) and needs to be disclosed in Schedule EI of ITR. 

Sale of Urban Agricultural Land 

Urban Agricultural Land is a capital asset, and the sale of such assets needs to be disclosed in Schedule CG in ITR. You can reduce the Indexed cost of acquisition and improvement from such sale value. You can also claim exemption u/s 54B, 54EC and 54F on the sale of Urban Agricultural Land

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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Section 54F