Written by : DG Gupta

A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries

How To Reduce The Amount of Capital Gain Tax on The Sale of Agricultural Land in India?

DG Gupta
DG Gupta, CA, CS

Jun 7, 2021 02:52

Buying or selling a piece of land involves enormous amounts of paperwork and taxes, especially when the land is an agricultural property. India is a country that largely depends on agriculture as one of the primary occupations. Thus, the cultivable lands are of utmost value to its people. According to WorldBank Data, nearly 60.4% of India's total land falls under the category of agricultural land in India.

It could be a draining task, both financially and physically, to sell or buy agricultural land. One can find it difficult to comprehend each and every aspect of selling and buying agricultural land and the underlying taxes that are imposed. Here in this article, let's look at the aspects that can help you save on taxes levied when you sell your agricultural land in India. First, let's start by first understanding which specific type of land is considered agricultural land as per the legal regulations in the country.

Which land is Agricultural land?

According to the relevant Indian laws, there are two categories of agricultural land in India- Urban agriculture land and rural agriculture land.

Rural agriculture land

For land to be in the category of Rural agriculture land, it must comply with the following clauses:

  1. A land is rural agricultural land if it is located within any municipality jurisdiction or with a population of 10,000.
  2. If it is external to any municipality then, the conditions are that it must be at a distance of-
  • More than 2 kilometers, from the municipality jurisdiction and with a population of more than 10,000 but not exceeding 100,000
  • More than 6 kilometers, from the municipality jurisdiction and with a population of more than 100,000 but not exceeding 1000,000
  • More than 8 kilometers, from municipality jurisdiction and with a population of more than 1000,000

If any of these clauses are satisfied, the land is considered rural agricultural land.

Urban agriculture land

The land situated within the limits of the municipality and is used for agricultural purposes, exclusive of the clauses of rural agriculture land, can be considered urban agriculture land.

Taxation in these cases:

Post the sale, the land can be used in two ways- either you can stock that and create a business income, or you can consider that as an investment; this turns into capital gain.

When it comes to rural agricultural land, it is not considered as a capital asset, and hence there is no consideration of capital gain or capital loss in this. However, urban agriculture land is considered as an asset, and hence there is a consideration of capital gain and capital loss during the sale and transfer of land.

Types of capital gains:

Two capital gains are applicable to the capital assets, including the sale of agricultural land in India. These two types include short term capital gains and long term capital gain. Short-term capital gain is applicable if the property is owned for one year or less than that by the current owner. On the other hand, the long-term capital gain is considered if the property is owned for more than one year or three years, depending on the capital asset's nature.

Calculation of capital gain:

The calculation of capital gain on the property is done using the cost inflation index. The cost inflation index is released each year by the income tax department, which is the standard at which properties' value increases. The difference between the cost inflation index of the year it was purchased and the year it was sold gives you the total capital gain.

Post the purchase, if you have made any changes in your agriculture land, for example, if you have added an irrigation plant or any service that will benefit the succeeding owner, this is considered an added value of the land. And this cost is known as the cost of improvement of the asset. In this case, the cost of improvement is deducted from the profit, and then the capital gain is considered. The tax is calculated on the deducted capital gain.

Once you considered and calculated all the taxes, the next step would be to search for ways to lower the tax burden. Exemptions available on the sale of agricultural land can prove quite useful. There are numerous types of exemptions available for agricultural land. Some of them are listed below-

1. Exemption in case of compulsory acquisition of agricultural land

Capital gain tax can be exempted in regard to Section 10(37) of the Income Tax Act, 1961. If the following terms have complied with, one can use the exemption to save some additional taxes-

  • The land must be urban agriculture land.
  • The land must be under agricultural use by the individual or his family member two years preceding the purchase.
  • Such income that arises by compensation or consideration for transfer received by such assessee on or after 1st day of April 2004.

If these are applicable to your land, then your capital gain can be exempted.

2. Exemption on other transfers:

Capital gain tax can be exempted under 54B of the Income Tax Act, 1961. Under this act, the following clauses need to be followed-

  • This exemption is available only to individuals or HUF.
  • The land must be under agricultural use by the individual or his family member two years preceding the purchase.
  • Another agricultural land is purchased in regard with the same amount of money within two years of sale.
  • The new agricultural land purchased to claim capital gain exemptions should not be transferred within 3 years from the date of its purchase.
  • If failed to purchase the land, the assessee must fill the capital gain returns to the bank or institution.

It is important to apprehend the meaning of transfer in parlance to a capital asset as per the Income Tax Act, 1961. A transfer includes the sale, exchange, relinquishment of an asset. It also covers the extinguishment of any rights over a given capital asset and also comprises the compulsory acquisition of the asset.

These are a few ways to reduce the capital gain tax levied when you undertake the sale of agricultural land in India. Tax planning before undertaking any transfer of agricultural land that is liable as per the Income Tax regulations is very helpful. It can help you save a considerable chunk of money. Knowing about the available exemptions and realizing your ability to use t same is crucial.

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DG Gupta
DG Gupta, CA, CS

Jun 7, 2021 02:52

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