By Arutla Prathap on April 12, 2024

Explore effective methods to minimize tax liabilities on the sale of agricultural land with our comprehensive guide. Learn essential strategies, exemptions, and deductions tailored to optimize your capital gains, ensuring you retain more profits while staying compliant with tax regulations.

• Rural Agricultural Land
• Urban Agriculture Land

This classification pertains to agricultural land in India, wherein:

(a) If located within a municipality with a population of less than 10,000, or

(b) If situated outside municipal limits, it falls under the following criteria:

(i) More than 2 km from the municipal boundary, where the population exceeds 10,000 but does not exceed 100,000; or

(ii) More than 6 km from the municipal boundary, where the population exceeds 100,000 but does not exceed 1,000,000; or

(iii) More than 8 km from the municipal boundary, where the population exceeds 1,000,000.

In cases where agricultural land fails to meet the criteria for classification as rural agricultural land, it falls under the designation of urban agricultural land. Put simply, any land not meeting the qualifications for rural agricultural land is automatically categorized as urban agricultural land.

• Agricultural land in rural India is exempted from being treated as a capital asset under Section 45 of the Income-tax Act, 1961. Consequently, profits derived from its sale are not subject to taxation under ‘Capital Gains’.
• Important to mention, to qualify for the non-taxability of Rural Agricultural land, engaging in agricultural operations is necessary to claim the exemption.
• If the land is held as inventory or if you are involved in the trade of buying and selling rural agricultural land, it will be categorized as business income and subject to taxation.

Urban agricultural land, distinct from rural areas, is regarded as a capital asset. Here’s how its taxation works:

For long-term capital gains on urban agricultural land, applicable after holding for more than 2 years, a tax of 20% is imposed, factoring in indexation benefits.

For short-term capital gains on urban agricultural land, incurred with a holding period of less than 2 years, taxes are levied at slab rates

The available exemption for the sale of urban agricultural land is:

• Under Section 10(37) of the Income Tax Act, capital gains on compensation received from the compulsory acquisition of urban agricultural land are tax-exempt. You can report this exemption under Schedule EI of your Income Tax return.

The condition to claim exemption under Section 10(37) is:

• The land must be classified as urban agricultural land.
• The land must have been utilized for agricultural operations in the two years preceding the transfer.
• The transfer must be conducted under a law approved by the Central Government or RBI.
• Exemption provided under Section 54B for the acquisition of another agricultural land.

When agricultural land is situated in a non-rural locality, exemption from capital gains tax can be sought under Section 54B of the Income Tax Act upon fulfillment of the following conditions:

• This exemption is accessible to both individuals and Hindu Undivided Families (HUFs).
• The land being sold must have been utilized for agricultural purposes by the individual, their parents, or the HUF for a continuous period of two years immediately preceding the date of transfer.
• Another parcel of land for agricultural purposes must be acquired within two years from the date of transfer of this land.
• The newly acquired agricultural land, for which capital gains exemption is sought, must not be sold within three years from the date of its purchase.
• If unable to purchase agricultural land before the Income Tax Return filing date, the capital gains amount must be deposited into a designated account at any branch (excluding rural branches) of a public sector bank or IDBI Bank, as per the Capital Gains Account Scheme, 1988. Exemption can be claimed for the deposited amount.
• If the deposited amount under the Capital Gains Account Scheme is not utilized for the purchase of agricultural land, it will be treated as capital gains in the year when the two-year period from the date of land sale expires. However, in this scenario, the deposited funds can be withdrawn for any purpose as desired.

• If the cost of the newly purchased agricultural land exceeds the capital gains amount, the entire capital gains are exempt.
• If the cost of the newly acquired agricultural land is less than the capital gains amount, the capital gains chargeable to tax will be calculated as follows: Capital Gains minus Cost of New Agricultural Land.

As per the Income-tax Act, rural agricultural land is not classified as a capital asset, thus any gains derived from it are not taxable. Income from agricultural land is exempt under section 10(1) and should be reported in Schedule EI of the Income Tax Return (ITR). However, profits from the sale of agricultural land, which are non-taxable, do not need to be disclosed in the income tax return.

Urban Agricultural Land is considered a capital asset, requiring disclosure in Schedule CG of the Income Tax Return (ITR). Indexed cost of acquisition and improvement can be deducted from the sale value. Additionally, exemptions under sections 54B, 54EC, and 54F can be claimed on the sale of Urban Agricultural Land.

A 1% Tax Deducted at Source (TDS) is required on transactions involving the sale or purchase of property when the transaction value exceeds Rs. 50 Lakhs. However, it’s important to note that Section 194IA for TDS on property does not apply to the sale or purchase of agricultural land, even if the transaction value exceeds Rs. 50 lakhs.