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

By CA Mohammed S Chokhawala

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Updated on: Jul 18th, 2025

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3 min read

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.

How to Identify Rural and Urban 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- 

 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.

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. Sale of urban agricultural land is taxable under capital gains.

Is Capital Gain Taxable on Sale of Agricultural Land?

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).

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 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:       

ParticularsAmount
Long-term capital gain arising on transfer of old land8,40,000
Less: Exemption under section 54B (lower of 8.4 lakhs or 5 lakhs)5,00,000
Capital Gains chargeable to tax3,40,000

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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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

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.

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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