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

Agriculture is the backbone of the Indian economy,  the agricultural land provides employment to many people and produces food to feed the nation. Agricultural land means land upon which agricultural activities are carried out.  From an Income tax perspective, agricultural land is classified into two types

1. Rural Agricultural Land
2. Urban Agriculture Land

Rural Agriculture Land: 

It means an agricultural land in India – 

(a) If situated in any area which 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- 

Capital Gain on Sale of Rural Agricultural Land

Agricultural land in rural areas in India is not considered a capital asset under section 45 of the Income-tax Act,1961. Therefore any gains from its sale are not taxable under the head 'Capital Gains'. 

Capital Gain on Sale of Urban Agricultural Land

Urban agricultural land ( land which is not rural land) is considered a capital asset. The taxability of Urban Agriculture land is as follows

Long-term capital gain - If the agricultural land is held for more than 2 years then the tax rate is as follows:

• Before 23rd July 2024: 20% with indexation benefit
• From 23rd July 2024: 12.5% without indexation benefit or 20% with indexation benefit whichever is beneficial.

Short-Term capital gain - If the agricultural land is held for less than 2 years then it is taxed at slab rates. 

Exemption on the Sale of Urban Agricultural Land:

• 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. You can declare the same under Schedule EI of your Income tax return.

Condition to claim exemption u/s 10(37):

• Land should be urban agricultural land
• Such land should be used for agricultural operations in the preceding 2 years before such transfer.

If the agricultural land is in a urban 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 that is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for 2 years immediately before the date of transfer.
• Another land for agricultural purposes should be purchased within 2 years from the date of transfer of this land.
• The new agricultural land that 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 the rural branch) of a public sector 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 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:

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

For example:- If you sold agricultural land in April, 2019 for Rs. 25,20,000 and the long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. In December 2019, you purchased another agricultural land worth Rs. 5,00,000. Then, the agricultural income tax calculation for AY 2019-20 in your hand would be calculated as follows:                                                                                                    

The new agricultural land shall have a lock-in of 3 years from the date of its acquisition.

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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