Capital gains tax on the sale of agricultural land depends on whether the land is urban or rural. If you sell urban agricultural land, the profit is taxable under capital gains, but exemptions are available under Section 54B. However, if you sell rural agricultural land, it is not considered a capital asset, and no capital gains tax applies and hence, not taxable.
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-
Shortest aerial distance from the local limits of a municipality or cantonment board | Population according to the last census | |
1 | < 2 kms | > 10,000 |
2 | > 2 kms but < 6 kms | > 1,00,000 |
3 | > 6 kms but < 8 kms | > 10,00,000 |
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.
Yes, capital gain on the sale of agricultural land is taxable only if the land is classified as urban agricultural land under the Income Tax Act.
However, capital gain on the sale of rural agricultural land is not taxable because it is not considered a capital asset as per Section 2(14)(iii).
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 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.
If your land is urban agricultural land, you can save tax by reinvesting the sales proceeds under Section 54B by fulfilling the following conditions:
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:
Particulars | Amount |
Long-term capital gain arising on transfer of old land | 8,40,000 |
Less: Exemption under section 54B (lower of 8.4 lakhs or 5 lakhs) | 5,00,000 |
Capital Gains chargeable to tax | 3,40,000 |
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.
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
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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