Whether Capital Gain on Sale of Agricultural Land Taxable?

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Business Mantra: Faridabad

Whenever anyone sells or transfers agricultural land then questions arise in his or her mind are whether the gain on sale will be taxable or not. Under what circumstances this gain is not taxable and if taxable then how the exemption can be availed from paying tax on it.

To understand this issue first one should check following facts on case to case basis:

  • Whether the land sold is Agricultural Land.
  • It is rural agricultural land or urban Agricultural Land (based on population and distance from Municipality)
  • Agricultural land has been transferred due to Compulsory Acquisition of Land by Government or it has been sold to some other person.
  • Whether amount of gain on transfer of Agricultural Land has been invested in purchase of another Agricultural Land or not.

For this purpose, we should understand section 2(14), section 10(37) and section 54B of Income Tax Act, 1961.

Analyzing these facts and deciding whether the gain on transfer or sale of Agricultural Land will be taxable or not will be very easy after understanding the below given explanations in tabular form.

Basis Rural agriculture land Urban agriculture land
1.      Definition According to section 2(14) Capital Asset does not include Agricultural Land in India not being that land which is situated:-

a) In any area which is comprised within the jurisdiction of a municipality and its population should be10000 or more.

Or

b) If situated outside the limits of Municipality, etc. but , it is situated at a distance, measured aerially.

i) Being less than 2 km from local limits of M.C or Cantonment Board, which has a population of more than 10000 but not exceeding 100000

Or

ii) Being less than 6 km from the local limits of any M.C or Cantonment Board, which has a population of more than 100000 but not exceeding 1000000

Or

Iii) Being less than 8 km from the local limits of M.C or Cantonment Board which has a population of more than 1000000.

For understanding purpose we may call it Rural Agricultural Land and land other than this land on which agricultural activity is performed may be termed as Urban Agricultural Land.

Any land other than the land discussed in previous column, if agricultural activity is performed on it then we may call it Urban Agricultural land.

2. Taxability under head of capital Gain NoBecause Agriculture Land is not Capital Asset u/s 2(14) of I T actSo gain on Sale of Rural Agriculture Land is not taxable. Yes

Taxable under head of capital gain

However in case of compulsory acquisition exemption u/s 10(37) is available.

In case of transfer of agriculture land by a mode other than compulsory acquisition by Government exemption u/s 54B is available on fulfilling certain terms and conditions.

3. Agriculture Land head as stock-in-trade Taxable under “Profit and Gain from Business & Profession” head Taxable under ‘’Profit and Gains from Business and Profession” head
4. Exemptions of Capital Gain on compensation received on Compulsory Acquisition by Government u/s  10(37) As not being a Capital Asset so  no Capital Gain

Any Capital Gain (whether short term or long term) arising to individual and HUF from transfer of Agriculture Land shall be exempted provided compensation or enhanced compensation ,is received on or after 1.4.2004

(whether acquisition has taken place before 1.4.2004 and compensation is received after 1.4.2004 than exemption will be available (if enhanced compensation is received after 1.4.2004 than it will also be exempt)

5. Availability of exemption u/s 54B on Capital Gain

As Not being a Capital Asset so  no Capital Gain 1.  Available only to individual and HUF

2.  Agriculture Land being sold should be 3 years old i.e. the gain on its sale should be Long Term Capital Gain.

3. Deduction will be available for capital gain arisen in transfer of Urban Agriculture Land to the extent of, amount invested in purchase of another Agriculture Land within 2 years of date of transfer of Original Agriculture Land.

4.  This land has been used by individual, HUF for agriculture purpose during 2 years immediately preceding the date of transfer

5.  The amount of Capital Gain may be invested to purchase  another Agriculture Land (whether Urban or Rural)

6. The amount of Capital Gain, which is not utilized by the Assessee for the purchase of another Agriculture Land before the date of furnishing of the return of income, should be deposited by him/her under the “Capital Gains Accounts Scheme”, before than due date of furnishing the Return of Income and Assessee can claim the deduction of such amount deposited in the relevant Assessment Year.

7.  In case Assessee does not utilize such amount deposited in scheme within 2 years of transfer of agriculture land for purchase of another Agriculture Land than unutilized amount of Capital Gain will be taxable under Capital Gain head for that previous year in which time period of 2 years expires.

8. If new purchased Agriculture Land is transferred within a period of 3 years of its purchase, than Capital Gain which was exempted earlier u/s 54B shall be reduced from the cost of new Agriculture Land, for the purpose of computation of Capital Gain in respect of new Agriculture Land. So if new land purchased is Urban Agricultural Land then it will attract Capital Gain Tax and if new land purchased was Rural Agricultural Land then no Capital Gain will be taxable now.

 

Deduction under section 54F is also available from Capital Gain from sale of Agriculture Land if the Capital Gain so generated is invested to purchase a residential house either 1 year before or 2 years after the date of sale of Agriculture Land or the Assessee constructs the house in 3 years from date of sale of Agriculture Land.

This deduction is also available to only individual and HUF and for Long Term Capital Gain only.

The Assessee should own only one house other than this house purchased for setting off the Capital Gain.

This newly purchased or constructed house should not be sold upto 3 years from the date of purchase or construction of new house, otherwise the deduction claimed will be taxable in the year of transfer of new house.

Deduction u/s 54EC is also available to save capital gain tax on sale of agriculture land. If the long term capital gain (Agriculture land sold was held by assessee for more than 3 years) arised on sale of agriculture land is invested in bonds of NHAI and RECL within a time span of 6 months from the date of transfer of said agriculture land.

Maximum amount available for deduction is Rs. 50.00 lakhs in the section.

Bonds so purchased should not be transferred upto 3 years from date of purchase and loan and advances also can not be taken against security  of these bonds

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