Decoding Capital Gains On The Sale Of Agricultural Land in India

Published on:
December 19, 2023

Selling your agricultural land in India involves understanding capital gains – the profit from the sale – and navigating specific tax rules. If your land is in a rural area, you might enjoy exemptions, but for urban areas, capital gains on the sale of agricultural land tax applies. Unpacking these details is crucial for making informed decisions about your land sale and managing your finances wisely. In the upcoming sections, we'll simplify the complexities of agricultural land sales, discussing exemptions, tax on the sale of agricultural land, and the necessary disclosures for a smooth journey through the process.

Tax of Agricultural Land in India

Let's break down the tax talk into simple bits. 

Overview of Capital Gains on the Sale of Agricultural Land

What's capital gains tax on the sale of agricultural land? It's like a fee you pay when you make a profit selling something big, like land. But here's the twist—agricultural land can be a bit special. We'll chat about how this tax works for farm sales and what it means for you.

 Why Tax on the Sale of Agricultural Land Laws Matter

Think of tax laws like the rules of the game. Knowing them helps you play smart. In this section, we'll chat about why these rules are a big deal when you're selling your farm. From where your land is to how long you've had it, each detail affects your tax bill. Let's unravel these rules together, so you're ready for a smooth sale without any tax surprises.

Taxation Based on Location

When it comes to taxes on selling your land in India, where your land is located matters. Let's keep it simple:

Rural Agricultural Land

  • Agricultural land in rural areas is characterised by the following conditions:
  • (a) Situated within a municipality with a population of fewer than 10,000.
  • (b) Located outside the municipality and meeting the following criteria:
  •  Positioned at a distance greater than 2 km from the local boundaries of a municipality with a population exceeding 10,000 but not exceeding 100,000.
  • Positioned at a distance greater than 6 km from the local boundaries of a municipality with a population exceeding 100,000 but not exceeding 1,000,000.
  •  Positioned at a distance greater than 8 km from the local boundaries of a municipality with a population exceeding 1,000,000.

Agricultural land classified as urban encompasses any land not meeting the specified conditions for rural agricultural land. 

Tax Implications of Agricultural Land Sale in India

The taxability of the sale of agricultural land in India depends on the land type and its intended use, as outlined below:

Taxation on Sale of Rural Agricultural Land

In the case of rural agricultural land, it does not qualify as a capital asset. Consequently, no capital gains or losses are realised upon the transfer or sale of rural agricultural land.

Urban Agricultural Land

Urban agricultural land, on the other hand, is considered a capital asset, and capital gains arise from its sale or transfer. The nature of these capital gains—whether long-term or short-term—depends on the duration of the asset's holding period.

  • If the land is held for more than 2 years, it is deemed a long-term capital gain and is subject to a 20% tax rate.
  • For a holding period of less than 2 years, the gain is treated as a short-term capital gain and taxed at the applicable slab rate.

Managing Agricultural Land as Business Inventory

If you actively participate in the routine buying and selling of agricultural land as a component of your business operations, treating it akin to stock-in-trade, any profits derived from the sale of such land are liable to be taxed under the Business and Profession category. In such cases, capital gains will not be levied on the sale of agricultural land.

Exemptions on Capital Gains on Agricultural Land Sale [Section 54B]

When disposing of agricultural land in rural areas, no capital gains tax is applicable, as it is not recognized as a capital asset. However, in non-rural regions, individuals or Hindu Undivided Families (HUFs) seeking an exemption from capital gains tax may invoke Section 54B of the Income Tax Act, 1961, subject to the following stipulations:

  1. Eligible Claimants: Only individuals or Hindu Undivided Families (HUFs) are eligible to claim the exemption.
  2. Nature of Land: The land being sold must qualify as agricultural, whether classified as a long-term or short-term capital asset.
  3. Previous Agricultural Use: The individual or their parents must have utilised the land for agricultural purposes for a minimum of two years before the sale. For HUF, any member can have utilised the land.
  4. Purchase of New Land: The taxpayer must acquire another agricultural land within two years of selling the old one. Alternatively, if not making a purchase, the capital gains from the agricultural land sale should be deposited in the Capital Gains Account Scheme and subsequently withdrawn for acquiring the new land.
  5. Tax Implications: If the new land is sold within three years of purchase, the tax exemption will be revoked, and the taxpayer must pay tax on the sale of agricultural land, which was initially claimed as exempted.

Notably, companies, LLPs, and firms are ineligible for this exemption, which is exclusively applicable to individuals and HUFs. The exemption amount is determined based on the lower cost of the new agricultural land or the capital gains from the sale of the old agricultural land. This exemption encompasses both long-term and short-term capital gains and remains valid even if the new agricultural land is purchased in another person's name or in a different state or urban area than the old agricultural land.

Section 10(37) of the Income Tax Act, 1961 

This provision grants an exemption from capital gains tax for the compulsory sale of agricultural land, contingent upon specific conditions:

  1. The exemption is exclusively applicable to individuals or Hindu Undivided Families (HUF).
  2. It pertains to capital gains arising from the transfer of agricultural land.
  3. The agricultural land must be situated within the jurisdiction of a municipality, municipal corporation, notified area committee, or town area committee, or a specified distance from these limits, based on the population:
Population Limit Distance Limit
Up to 1 Lakh Up to 2 km
1 Lakh - 10 Lakhs Up to 6 km
More than 10 Lakhs Up to 8 km
  1. The land must have been utilised for agricultural purposes for a minimum of two years by an individual, their parents, or HUF.
  2. The transfer must result from compulsory acquisition under any law, or the transfer consideration must receive approval from the Central Government or Reserve Bank of India.
  3. The compensation received must be after 1st April 2004.

Disclosure of Sale of Agricultural Land in Income Tax Return (ITR)

Properly addressing the income tax implications of agricultural land is essential for accurate reporting in your Income Tax Return (ITR). Here's a detailed breakdown:

1. Tax Definition of Agricultural Land

Agricultural land utilised for farming is eligible for tax exemptions provided it meets specific criteria, including being situated outside city or town limits based on population and distance.

2. Exemption as Non-Capital Asset

If your agricultural land aligns with the tax definition, it is not treated as a capital asset for taxation purposes. Profits from the sale or transfer of such land are not considered taxable income.

3. Non-Disclosure in ITR

Given that profits from the sale of agricultural land, meeting the tax definition, are exempt from tax, there is no obligation to disclose these profits in your income tax return.

4. Exempt Agricultural Income Disclosure

However, any income directly generated from agricultural activities qualifies as exempt income. This agricultural income must be disclosed in the income tax return to calculate the average tax rate. It's important to note that profits from the sale of agricultural land meeting the tax definition as a non-capital asset do not need to be disclosed in the income tax return. Conversely, exempt agricultural income derived from farming activities should be disclosed for tax calculation purposes.

Income Tax on Sale of Ancestral Agricultural Land

When selling ancestral agricultural land and realising a profit alongside co-owners, capital gains tax comes into play. The taxable amount is computed based on the higher value between the selling price and the stamp value. The cost of acquisition is established by the original purchase price or the fair market value in 2001, whichever is greater.

To determine the indexed cost of acquisition, multiply the cost of acquisition by the cost-inflation index for the sale year. For example, if the land is sold in 2023, refer to the cost-inflation index for that specific year.

The difference between the selling price and the indexed cost signifies long-term capital gain, which is subject to a flat tax rate of 20%. Nevertheless, it is possible to potentially circumvent this tax on agricultural land by reinvesting the gains in a new house or bonds issued by NHAI or RECL, adhering to the provisions outlined in Section 54F and Section 54EC of the tax code.

Who Qualifies for Exemption under Section 54B of the Income Tax Act for the Sale of Agricultural Land?

Individuals and Hindu Undivided Families (HUFs) have the opportunity to benefit from the exemption provided by Section 54B of the Income Tax Act. It's important to note that this exemption does not apply to companies, LLPs, and firms. The eligibility criteria for claiming this exemption include:

  1. The agricultural land being sold must have been utilised for agricultural purposes by the individual or HUF for a minimum of two years before the sale.
  2. The newly acquired agricultural land must also be designated for agricultural purposes.
  3. The purchase of the new agricultural land must take place within two years from the sale of the old agricultural land.
  4. The exemption is limited to the lower of the capital gains from the sale or the cost of the new agricultural land.

How much exemption is permitted under Section 54B of the Income Tax Act?

The computation of the exemption under Section 54B of the Income Tax Act is contingent on the lower value between the cost of the new agricultural land and the capital gains from the sale of the old agricultural land. Here are additional particulars regarding the exemption:

  1. The exemption applies to both long-term and short-term capital gains arising from the sale of agricultural land.
  2. The validity of the exemption persists even if the new agricultural land is registered in the name of another individual, such as a spouse or child.
  3. The exemption remains valid even if the new agricultural land is acquired in a different state or in the same urban area where the old agricultural land was situated.

TDS on Agricultural Land Sale

In real estate transactions, individuals are required to deduct a TDS rate of 1% when the transaction value exceeds 50 Lakhs. It's essential to note that this TDS rate, as outlined in Section 194IA, does not extend to transactions involving the sale or purchase of agricultural land. Therefore, even if the transaction value for agricultural land exceeds Rs. 50 Lakhs, TDS on Property is not applicable.

Final Word

When dealing with the sale of agricultural land in India, understanding tax rules is crucial. Section 54B offers exemptions for individuals and Hindu Undivided Families (HUFs), but meeting specific conditions is vital. Also, note that TDS rules for property transactions don't apply to agricultural land. Seek guidance from experts to navigate these regulations and ensure a smooth and financially sound land sale experience.

Capital Gains FAQs

1. What is a Section 54 exemption for the sale of agricultural land?

Section 54B of the Income Tax Act lets farmers or families owning agricultural land avoid paying extra tax when they sell their farm and buy a new one. This means, if you sell your farm and quickly buy another, you don't have to give a big chunk of the money you made to the tax office. It's like a special rule to help farmers when they switch from one farm to another.

2. Is profit on the sale of agricultural land agricultural income?

If you sell farmland in a rural area, you usually don't have to pay taxes on the money you make from the sale. This is because agricultural land in rural areas is not considered a capital asset for tax purposes. However, it's essential to check your local tax rules to be sure.

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