Agriculture is the backbone of the Indian economy, providing employment to many people and producing food to feed the nation. From an income tax perspective, agricultural land is classified into two types: Rural Agricultural Land and Urban Agricultural Land.
Types of Agricultural Land
Rural Agricultural Land:
- Located within the jurisdiction of a municipality with a population of less than 10,000.
- Located outside the limits of a municipality but within a specific distance, based on the population according to the last census.
| Distance from Municipality Limits | Population |
|---|---|
| < 2 kms | > 10,000 |
| 2-6 kms | > 1,00,000 |
| 6-8 kms | > 10,00,000 |
Urban Agricultural Land:
Any land that does not meet the criteria of rural agricultural land is considered urban agricultural land.
Capital Gains on Sale of Agricultural Land
1. Rural Agricultural Land:
- Not considered a capital asset under Section 45 of the Income-tax Act, 1961.
- Gains from the sale of rural agricultural land are not taxable under ‘Capital Gains’.
- If used as stock-in-trade or if involved in buying and selling, gains are taxed as business income.
2. Urban Agricultural Land:
- Considered a capital asset.
- Long-term capital gain (holding period > 2 years): Tax @ 20% with indexation benefit.
- Short-term capital gain (holding period < 2 years): Tax @ slab rates.
Exemptions on Sale of Urban Agricultural Land
Under Section 10(37): Capital gains on compensation received from the compulsory acquisition of urban agricultural land are exempt from tax if:
- The land was used for agricultural operations two years before the transfer.
Under Section 54B: Exemption on capital gains if:
- The seller is an individual or HUF.
- The land was used for agricultural purposes for two years immediately before the transfer.
- New agricultural land is purchased within two years from the date of transfer.
- The new land should not be sold within three years from the date of purchase.
- The capital gains must be deposited in a Capital Gains Account Scheme if not purchased before filing the return.
Amount of Exemption:
- The entire capital gain is exempt if the cost of new agricultural land > capital gains.
- If the cost of new agricultural land < capital gains, the exemption is the cost of new farmland, and the remaining amount are taxable.
Disclosure in Income Tax Return (ITR)
Sale of Rural Agricultural Land:
- Gains are exempt under Section 10(1) and must be disclosed in Schedule EI of the ITR.
Sale of Urban Agricultural Land:
- Gains must be disclosed in Schedule CG of the ITR.
- Indexed cost of acquisition and improvements can be deducted.
- Exemptions under Sections 54B, 54EC, and 54F can be claimed.
TDS on Sale of Agricultural Land
TDS @ 1% on property transactions exceeding ₹50 Lakhs under Section 194IA is not applicable to the sale of agricultural land.
Frequently Asked Questions
- Do I need to file an ITR if I sell my rural agricultural land?
No, the sale of rural farmland is non-taxable, and its income is exempt. If your total income is below the basic exemption limit of ₹2.5 lakhs, you are not required to file an ITR. - Is agricultural land exempt from tax?
Only rural agricultural land is non-taxable. Urban agricultural land is taxable, but exemptions can be claimed under Sections 54B, 54EC, and 54F. - Can Section 54F exemption be claimed on the sale of agricultural land?
Yes, if you reinvest the proceeds in a new residential house property, subject to specific conditions. - Is TDS applicable when buying agricultural land?
TDS @ 1% applies if buying urban agricultural land but not rural land. - What is the cash transaction limit on the sale of agricultural land?
Section 269ST prohibits accepting more than ₹200,000 in cash from a single person or for a transaction. - What is the exemption under Section 54B?
When urban agricultural land is sold, you can claim an exemption if you buy another agricultural land within two years from the sale date and meet other conditions. - What taxes apply to the sale of urban agricultural land?
Long-term capital gains tax @ 20% with indexation or short-term gains taxed as per slab rates. - Can I claim an exemption under Section 54B?
Yes, if the land was used for agriculture for two years before the sale and new land is purchased within two years of the sale. - Is rural agricultural land considered a capital asset?
Rural agricultural land is not considered a capital asset, but urban agricultural land is.
Conclusion
Understanding the tax implications and exemptions available on the sale of agricultural land can help individual taxpayers and business owners make informed decisions. By leveraging the available exemptions and ensuring proper disclosure in tax returns, taxpayers can optimize their tax liabilities effectively.