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

By CA Mohammed S Chokhawala

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Updated on: Jun 5th, 2025

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4 min read

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- 

 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.

MEANING OF RURAL AGRICULTURAL LAND

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. 

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:

  • 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:                                                                                                    

Long-term capital gain arising on transfer of old land

840000

Less: Exemption under section 54B (lower of 8.4 lakhs or 5 lakhs)

500000

Capital gains chargeable to tax

340000

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.

Related Articles

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F

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Frequently Asked Questions

Is agricultural land exempt from tax?

Only rural agricultural land is non-taxable. Urban agricultural land is taxable however, you are eligible to claim exemption u/s 54B , 54EC and 54F.

Can section 54F exemption be claimed on the sale of agricultural land?

Yes, Section 54F exemption can be claimed when you reinvest the proceeds of such sale of agricultural land into new residential house property subject to conditions underlying the same.

Is TDS applicable while buying agricultural land?

TDS u/s 194IA @ 1% needs to be deducted if you are buying urban agricultural land. If you are buying rural agricultural land, then no TDS is applicable since such land is not considered a capital asset.

What is the limit of cash transactions on sale of agricultural land?

Provision of Section 269ST mentions that no person can accept an amount exceeding Rs. 200,000 from a person or w.r.t a single transaction. Acceptance of such an amount will lead to a 100% penalty u/s 271DA.

This provision is applicable for all types of transactions, Thus irrespective of the nature of the transaction, Whether rural or urban agricultural land this section will be applicable. Thus maximum cash transaction on the sale of agricultural land is Rs 200,000.

What is exemption under Section 54B under Income Tax Act?

The exemption under Section 54B provides that when an urban agricultural land is sold then you can claim exemption provided the land was used for agricultural purposes for at least two years and you purchase another agricultural land (rural or urban) within 2 years from the date of transfer.

What are the tax charged on selling urban agricultural land?

The sale of urban agricultural land is subject to capital gains tax. For long-term capital gains (LTCG), the tax rate is typically 20% with indexation benefits. However, from 23rd July 2024, the tax rate has been reduced to 12.5% without indexation.

The indexation benefit, which was previously available on the sale of long-term assets, has now been removed. However, taxpayers can choose to calculate taxes on land purchased before 23rd July 2024 at either 12.5% without indexation or 20% with indexation, whichever results in a lower tax liability.

If the land is sold within two years i.e. short-term, the tax will be applicable as per the applicable slab rates.

Can i claim exemption under section 54B?

Exemption under section 54B is available only for agricultural land for atleast 2 years before sale. If you have newly purchased land within 2 years of sale, then you can claim exemption.

Will rural agricultural land be considered as a capital asset?

Rural agricultural land cannot be considered as capital asset, however, urban agricultural land can be considered as capital asset.

Can you reinvest capital gains to avoid taxes in India?

Section 54 of the Act allows individuals or Hindu Undivided Families (HUFs) to reduce their tax liability by reinvesting capital gains in a single residential property.

What is HRA (House Rent Allowance)?

House Rent Allowance (HRA) is an allowance (part of CTC) given by your employer to help you cover the cost of living in a rented accommodation.

Who can claim HRA exemption?

Salaried individuals who receive House Rent Allowance (HRA) as part of their income are eligible for tax relief, on the condition that they reside in rental housing.

Can I claim HRA without landlord’s PAN?

Yes , You can claim HRA without a landlord's PAN if your annual rent paid is less than Rs. 1 lakh. However, if your rent exceeds Rs. 1 lakh per year, you will need to provide the landlord's PAN.

What is the penalty for non-submission of documents?

If an employee claims HRA for more than Rs. 1 lakh without submitting the required documentation and declaration, they will not be entitled for the tax exemption. The HRA amount will be taxed according to the applicable tax slab.

Are there any exceptions to submitting rent receipts or PAN of the landlord?

Yes. If your HRA claim is up to Rs 3,000 per month, you are not required to submit rent receipts. However, it is still recommended to keep them for your records.

Which income types are taxable u/s 28 of the ITA?

Section 28 comprises business operation profits, compensation payments, Keyman insurance policy proceeds and export incentives.

What are the amendments to Section 28?

From April 1, 2024, Section 28 includes benefits or perquisites received in cash, non-cash, or a combination of both, as provided by the Finance Bill 2023 amendment.

What records are needed to comply with Section 28?

For proper compliance with Section 28 of the ITA, there is a requirement by professionals and business undertakings to keep receipts, invoices, contracts and books of accounts.

What is the tax rate for Income from the business and profession?

For Individual taxpayers the rate of tax is based on the slab of tax in which your income comes; the rate of tax for income of business and profession is the same as income of other sources in case of individual assessee.

What expenses can be claimed as a deduction under Section 28?

Under Section 28, one can claim expenditure that is incurred wholly and exclusively in the business of carrying on a trade or profession. The expenses can cover items like rent, wages, salary, advertisement, maintenance and repairs, and interest on loans taken for the business.

How does Section 28 impact the tax treatment of income from a partnership firm?

Under Section 28, profits of a partnership firm are taxed as the income of the firm. The firm must file its tax return and pay tax on profit, and partners are separately taxed on their share of income of the firm. 

About the Author
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CA Mohammed S Chokhawala

Content Writer
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I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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