Selling agricultural land in India involves considerations of capital gains tax, but specific exemptions and strategies can help mitigate tax liability. This guide explains the tax provisions and methods to save taxes on capital gains from the sale of agricultural land, with a focus on recent amendments and exemptions.
Budget 2024 Updates
Key amendments effective from FY 2024-25 include:
- Streamlined Holding Periods for Capital Assets:
- 12 months for listed securities.
- 24 months for all other assets, including immovable property.
- Revised Classification of Capital Assets:
- Listed securities held for more than 12 months are now long-term capital assets.
- Immovable property held for over 24 months qualifies as long-term capital assets.
- Taxation of Short-Term Capital Gains (STCG):
- STCG from property sales continues to be taxed at slab rates.
Saving Tax on Capital Gains from Agricultural Land
An exemption under Section 54B of the Income Tax Act provides significant relief if:
- The land has been used for agricultural purposes for at least two years before the sale.
- Sale proceeds are reinvested in agricultural land within two years.
What is Agricultural Land?
Agricultural land in India is categorized as:
- Rural Agricultural Land:
- Located within a municipality with a population of less than 10,000.
- Situated beyond specified distances from municipalities based on population thresholds (2 km, 6 km, or 8 km).
- Urban Agricultural Land:
- Any agricultural land that does not meet the rural criteria.
- Rural Agricultural Land:
- Not considered a capital asset; therefore, gains from its sale are not taxable.
- Urban Agricultural Land:
- Considered a capital asset; gains are taxable depending on the holding period.
- Holding for over two years results in long-term capital gains (LTCG), taxed at 20%.
- Short-term gains are taxed at slab rates.
- Agricultural land held as stock-in-trade is taxed under business income.
- Claim Agricultural Income Exemption:
- Land used for farming for at least two years before the sale can qualify as exempt agricultural income under Section 10(1).
- Choose Between Indexation and Non-Indexation:
- Compare LTCG calculations with 12.5% tax (no indexation) or 20% tax (with indexation).
- Reinvest in Agricultural Land:
- Utilize Section 54B by purchasing new agricultural land within two years.
- Classify as Business Income:
- Gains from land held as business stock may attract a lower tax rate.
- Invest in Residential Property:
- Section 54F allows exemptions if proceeds are invested in residential property within specific timelines.
- Utilize Capital Gains Bonds:
- Section 54EC provides relief for investments in specified bonds within six months of sale.
- Leverage Joint Ownership:
- Co-owners can individually claim exemptions, reducing tax liability.
- Plan the Sale Strategically:
- Selling in a year with lower income can minimize tax impact.
- Applicable to individuals and HUFs.
- Land must have been used for agriculture by the seller or their family for at least two years.
- Proceeds must be reinvested in agricultural land within two years or deposited in a Capital Gains Deposit Account.
- Lower of the capital gains amount or investment in new land.
- Example:
- Sale proceeds: Rs. 25,20,000
- Capital gain: Rs. 8,40,000
- Investment in new land: Rs. 5,00,000
- Exemption: Rs. 5,00,000
- Unutilized funds in the deposit account become taxable after two years.
- Selling the new land within three years results in withdrawal of exemption.
- TDS at 1% applies to transactions exceeding Rs. 50 lakhs.
- This does not apply to rural agricultural land transactions.
| Distance from Municipality | Population | Type of Land |
| Within municipality | <10,000 | Rural Agricultural |
| >2 km | 10,000-1,00,000 | Rural Agricultural |
| >6 km | 1,00,000-10,00,000 | Rural Agricultural |
| >8 km | >10,00,000 | Rural Agricultural |
Taxability of Agricultural Land
Strategies to Reduce Taxes on Agricultural Land Sales
Comprehensive Overview of Section 54B
Eligibility Criteria:
Quantum of Exemption:
Consequences of Non-Compliance:
TDS on Sale of Agricultural Land
Conclusion
The taxability of capital gains on agricultural land hinges on whether the land qualifies as rural or urban and the seller’s compliance with provisions under Section 54B. By leveraging exemptions, strategic reinvestments, and adhering to the guidelines, taxpayers can significantly reduce their tax liability. Consulting with a tax professional is advisable to optimize tax planning and ensure compliance with current regulations.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
