Introduction to Capital Gains Tax on Agricultural Land

Capital Gains Tax (CGT) is a tax applied to the profit or gain from the sale of a capital asset. Whether agricultural land is considered a capital asset under the Income Tax Act, 1961 depends on its location and usage. The first step in understanding the tax implications is determining if your agricultural land is classified as a capital asset.

Classifying Agricultural Land: Rural vs. Urban

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The classification of agricultural land as rural or urban is a key factor in determining its tax status.

1. Rural Agricultural Land: According to Section 2(14) of the Income Tax Act, land is classified as rural if it is situated outside the jurisdiction of a municipality or cantonment board with a population of at least ten thousand. Additionally, if the land is outside of municipal limits, it must be at a certain distance from the nearest municipality, based on population:

   • More than 2 kilometers from a municipality with a population between 10,000 and 100,000.
   • More than 6 kilometers from a municipality with a population between 100,000 and 1,000,000.
   • More than 8 kilometers from a municipality with a population exceeding 1,000,000.

2. Urban Agricultural Land: Urban agricultural land is defined as any agricultural land that does not meet the criteria for rural agricultural land. This includes land within the jurisdiction of a municipality or cantonment board with a population of at least 10,000. Any land that does not fall under the definition of rural agricultural land is considered urban agricultural land. Capital gains on the sale of urban agricultural land are subject to income tax.

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Tax Implications of Selling Rural Agricultural Land

The sale of rural agricultural land is tax-exempt as it is not considered a capital asset under Section 45 of the Income-tax Act, 1961. This means no capital gains tax applies, and profits from the sale are not taxable. However, exempt income must be disclosed in Schedule EI of the Income Tax Return (ITR).

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Capital Gains Tax on Sale of Urban Agricultural Land

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If your agricultural land is classified as urban, the sale is subject to Capital Gains Tax (CGT). The applicable tax rate hinges on the holding period of the land.

Important Considerations:

• Exemptions: Certain exemptions, such as Section 54B, 54EC, and 54F, may be available to reduce the tax liability.
• Business Income: If you're regularly buying and selling agricultural land, the gains might be treated as business income[.
• TDS: Tax Deducted at Source (TDS) at 1% should be deducted on the sale or purchase of transactions involving the sale of property where the transaction value exceeds Rs.50 Lakhs.

Calculating Capital Gains

To calculate capital gains, follow these steps:

1. Determine the Sale Price:

   This is the total value you receive from selling the land (the full consideration).

2. Calculate the Cost of Acquisition:

   This is the original price you paid to purchase the land.

3. Factor in the Cost of Improvement:

   Include all expenses directly related to improving the land. This could encompass things like leveling, fencing, irrigation systems, etc.

4. Compute Capital Gains: Use the following formula:

   • Capital Gains = Sale Price - (Cost of Acquisition + Cost of Improvement)

5. Determine Taxability: The resulting Capital Gains amount is then subject to capital gains tax. The specific tax rate will depend on:

   • The holding period of the land (short-term or long-term).
   • The applicable tax rates for the relevant assessment year.
   • Whether you are eligible to claim any exemptions under sections 54B, 54EC, and 54F.

Table for Quick Reference:

Special Cases: Tax on Inherited and Gifted Agricultural Land

When dealing with the sale of agricultural land that you've inherited or received as a gift, the key factor for tax calculation is how the cost of acquisition is determined.

• Inherited Land: For inherited agricultural land, the cost of acquisition is generally considered to be the original cost incurred by the previous owner (the person from whom you inherited the land).
• Gifted Land: Similarly, with gifted agricultural land, the cost of acquisition is typically the original cost incurred by the original owner (the person who gifted you the land).

Exemption Under Section 54B: Reinvesting in Agricultural Land to Save Tax

Section 54B of the Income Tax Act provides a tax exemption on capital gains arising from the sale of agricultural land, provided the proceeds are reinvested in purchasing new agricultural land. This offers relief to farmers and landowners transferring agricultural land. The government aims to encourage reinvestment in the agricultural sector through this provision.

Key Conditions to Claim the Exemption:

• Eligible Taxpayers: The exemption is available to individuals or Hindu Undivided Families (HUFs). Companies, LLPs, and Firms are not eligible.
• Type of Asset: The exemption applies to the sale of agricultural land, which can be a Long Term Capital Asset (held for over 24 months) or a Short Term Capital Asset (held within 24 months).
• Land Usage: The agricultural land sold must have been used for agricultural purposes by the individual, their parents, or a member of the HUF for at least 2 years before the transfer.
• Reinvestment: The taxpayer must purchase new agricultural land within 2 years from the sale of the old land. The new agricultural land should be in India.
• Nature of Land: Exemption under section 54B is available only on the sale of urban agricultural land.
• Capital Gains Deposit Account Scheme: If the capital gain is not utilized fully for acquiring new agricultural land until the income tax return filing date, the unutilized amount must be deposited in the Capital Gains Deposit Account Scheme to claim the exemption.

Amount of Exemption:

The exemption amount is the lower of the following:

• The cost of the new agricultural land.
• The amount of capital gains arising from the transfer of agricultural land.

Example:

If someone sells agricultural land for Rs. 25,20,000, resulting in a long-term capital gain of Rs. 8,40,000, and then purchases new agricultural land for Rs. 5,00,000, the exemption under Section 54B will be Rs. 5,00,000. The taxable long-term capital gains would then be Rs. 3,40,000.

Section 54B: Eligibility, Conditions, and Restrictions

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To successfully claim an exemption under Section 54B, ensuring you meet all specified criteria is critical. This section allows individuals and HUFs to reinvest proceeds from selling agricultural land into new agricultural land, thereby reducing their tax burden.

Key Requirements for Section 54B Exemption:

• Eligible Assessee: The assessee (taxpayer) claiming the exemption must be an individual or a Hindu Undivided Family (HUF). Other entities like companies or firms are not eligible.
• Land Usage: The agricultural land being sold must have been actively used for agricultural purposes. This usage must have been by the individual, their parents, or, in the case of a HUF, by a member of the HUF. This usage must have been in place for a minimum of two years immediately preceding the date of sale.
• Reinvestment Timeline: A new agricultural land must be purchased within a period of two years from the date of selling the original agricultural land.

Time Limits: Purchasing New Agricultural Land Under Section 54B

To successfully claim the exemption under Section 54B of the Income Tax Act, you must purchase new agricultural land within a specific timeframe. This provision allows taxpayers to reinvest their capital gains from the sale of agricultural land into new agricultural land, deferring their tax liability.

• Purchase Timeline: The new agricultural land must be purchased within two years from the date of selling the original agricultural land.
• Consequences of Non-Compliance: Failing to purchase the new agricultural land within this two-year window will result in the capital gains from the sale becoming taxabl.

Capital Gains Account Scheme (CGAS)

If you're unable to reinvest your capital gains into specified assets (like new agricultural land) before filing your income tax return, the Capital Gains Account Scheme (CGAS) offers a valuable solution. By depositing the unutilized capital gains into a CGAS account, you can still claim the exemption from capital gains tax.

Key Features and Benefits:

• Claiming Exemption: CGAS allows you to claim the capital gains exemption even if you haven't yet reinvested. The Income Tax Act requires a taxpayer who cannot reinvest capital gains in specified assets before filing the return of income, to deposit the unutilized capital gains into a Capital Gain Account before filing the return of income.
• Stipulated Timeframe: You must utilize the funds in the CGAS account to purchase new agricultural land or other qualifying assets within the stipulated timeframe to maintain the exemption. The amount deposited must be used within a stipulated time frame: For purchasing a new asset: 2 years from the end of the financial year in which the sale of the original asset took place. For constructing a new asset: 3 years from the end of the financial year in which the sale took place.
• Tax Implications of Non-Utilization: If the amount deposited in the CGAS remains unutilized within the specified period, it will be taxed as capital gains in the year the period expires. If the deposited amount is not utilized within the prescribed period, the taxpayer will lose the exemption benefit, and the amount will be subject to capital gains tax.
• Who can use it? CGAS is applicable to Indian residents. Non-residents have to open a non-resident CGAS account (NRCGAS).
• How to open: To open a CGAS account, fill out form A and submit it along with necessary attachments like address proof, photo, and a copy of your PAN card.

Tax Deducted at Source (TDS)

While Section 194IA of the Income Tax Act generally mandates a 1% TDS deduction on property transactions exceeding ₹50 lakhs, agricultural land sales have a crucial distinction. This TDS requirement is not applicable to agricultural land transactions, irrespective of the transaction value.

Key Points Regarding TDS on Agricultural Land:

• General TDS Rule: Typically, a buyer deducts 1% TDS when purchasing immovable property for over Rs 50 lakhs.
• Agricultural Land Exemption: However, this TDS rule under Section 194IA does not apply to the sale or purchase of agricultural land. This exemption acknowledges the unique role agriculture plays in the Indian economy.
• Rural vs. Urban: This TDS exemption applies to both rural and urban agricultural land.
• Section 269ST: Note that Section 269ST states that no person can accept more than Rs. 200,000 in cash from a person or with respect to a single transaction, and acceptance of such an amount will lead to a 100% penalty under Section 271DA. This applies to both rural and urban agricultural land.

Reporting Capital Gains on Agricultural Land in Income Tax Return (ITR)

Accurately reporting capital gains from the sale of agricultural land in your ITR is essential. The process depends on whether the land is classified as rural or urban.

Reporting Guidelines:

1. Rural Agricultural Land: Since rural agricultural land is not considered a capital asset, any gains from its sale are exempt from Capital Gains Tax. You must still disclose this exempt income in Schedule EI ("Exempt Income") of the appropriate ITR form.

• Use ITR-2 to report the proceeds under "Schedule EI".

2. Urban Agricultural Land: Urban agricultural land is considered a capital asset. Therefore, capital gains arising from its sale must be reported in Schedule CG ("Capital Gains") of the ITR.

• You'll need to provide details of the transaction, including the sale price, cost of acquisition, cost of improvement, and any exemptions claimed (e.g., under Section 54B).
• The applicable tax rate will depend on whether the gains are classified as short-term or long-term, based on the holding period.

Table Summary:

Recent Amendments, Case Laws, and Landmark Rulings

Recent updates to the Indian Income Tax system, stemming from the Union Budget 2025, include proposed changes and a new Income Tax Bill intended to simplify and modernize the tax structure.

The key amendments and expectations:

1. Simplified Tax Laws: A New Income Tax Bill, expected to be introduced, aims to reduce the number of existing sections from 298 to nearly half, enhancing clarity and efficiency in tax administration. The government has promised that the new law will be 50% shorter than the current one. The goal is to simplify legal language so that taxpayers can easily understand the provisions, reduce legal complexities, and lower penalties for certain offenses, making the tax system more taxpayer-friendly.

2. Increased Basic Exemption Limit: The basic exemption limit under the new tax regime has been increased from ₹3 lakh to ₹4 lakh. Consequently, individuals with an annual taxable income of up to ₹4 lakh will have zero tax liability.

3. Full Tax Rebate for Income up to ₹12 Lakh: The income threshold for availing a full tax rebate has been raised to ₹12 lakh under the new tax regime. Taxpayers earning up to this amount annually will pay no income tax; however, incomes subject to special tax rates, such as capital gains, are excluded from this rebate calculation.

4. Revised Income Tax Slabs: The new tax regime will feature an additional 25% tax bracket, expanding the total number of slabs to seven.

5. New Income Tax Slabs (New Tax Regime): The Budget 2025 announcement proposed these income tax slabs under the new tax regime:

   • ₹0 - ₹4 lakh: No Tax
   • ₹4 lakh - ₹8 lakh: 5%
   • ₹8 lakh - ₹12 lakh: 10%
   • ₹12 lakh - ₹16 lakh: 15%
   • ₹16 lakh - ₹20 lakh: 20%
   • ₹20 lakh - ₹24 lakh: 25%
   • Above ₹24 lakh: 30%

6. Tax-free Income Threshold: The 2025 budget raises the tax-free income threshold under Section 87A from ₹700,000 to ₹1.2 million for FY 2025-26.

7. Implementation: If passed, the new tax system will take effect from the financial year 2025-26 and will apply to taxpayers from the assessment year 2026-27.

8. Infrastructure Development: The government has increased capital expenditure by 10.1% for FY26 and allocated funds to modernize highways, railways, and urban transport systems. The Smart Cities initiative has received a fresh push, and incentives for real estate developers and homebuyers aim to make homeownership more accessible.

Conclusion

Understanding capital gains tax on agricultural land hinges on classifying it as rural or urban. Rural land isn't taxed, but report it in Schedule EI. Urban land triggers capital gains tax: calculate gains (sale price minus costs), factoring in holding period (short/long-term) and indexation. Utilize Section 54B by reinvesting within two years, or use the Capital Gains Account Scheme (CGAS). TDS under Section 194IA doesn't apply. Stay updated on tax laws and seek expert advice. Accurate classification, gain calculation, exemption usage, and staying informed ensure confident and compliant tax planning.