Classification of Agricultural Land:
Under the Income Tax Act, agricultural land is classified as a capital asset. However, there’s a specific exemption available for agricultural land situated in rural areas in India. Any gains/loss arising from the transfer of agricultural land in rural areas are not subject to capital gains tax.
Rural Agricultural Land:
- Located within the jurisdiction of a municipality and has a population of less than 10,000.
- In any area (distance measured aerially):
- Within 2 kms of the local limits of any municipality/ cantonment board with a population of more than 10,000 but within 100,000;
- Within 6 kms of the local limits of any municipality/ cantonment board with a population of more than 100,000 but within 10,00,000;
- Within 8 kms of the local limits of any municipality/ cantonment board with a population of more than 10,00,000.
The term population for this purpose means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
Urban Agricultural Land:
If agricultural land is situated in an urban area, any gains arising from its transfer are subject to capital gains tax. The capital gains tax is calculated based on the difference between the sale consideration and the indexed cost of acquisition.
Long-Term and Short-Term Capital Gains:
If the agricultural land has been held for more than 24 months (i.e., two years), the asset is classified as Long Term Capital Asset and the gains are considered long-term capital gains (LTCG), and they are taxed at a flat rate of 20% after applying indexation.
If the land is held for 24 months or less, the asset is classified as Short Term Capital Asset and the gains are considered short-term capital gains (STCG) and are taxed at the applicable income tax slab rates.
Indexation:
Indexation is a process used to adjust the cost of acquisition of the asset based on inflation. This helps in reducing the taxable capital gains by accounting for the increase in the value of money over time. The government issues inflation indices every year, which are used for indexation purposes.
Exemptions and Deductions:
Under certain circumstances, exemptions and deductions may be available to reduce the taxable capital gains.
Section 54B Conditions:
- Agricultural land has been transferred by Individual or Hindu Undivided Family (HUF).
- Agricultural land has been used by Individual or his parents or HUF for agricultural purposes during the 2 years immediately preceding the date of transfer.
- New agricultural land (rural or urban) is purchased within 2 years after the sale of original agricultural land.
- New agricultural land which is purchased to claim capital gains exemption should not be sold within a period of three years from the date of its purchase.
- Amount not utilized for the purchase/construction of land, should be deposited in Capital Gains Account Scheme before the due date of filing their Income Tax Return for the relevant financial year.
Section 54F Conditions:
- Land has been transferred by an individual or HUF.
- Land transferred is a long-term capital asset.
- Purchase a residential house within one year before or two years after the sale of asset or construct residential house within three years of the sale of asset.
- Individual or HUF does not own more than one residential house at the time of sale of land, apart from the one they bought to claim the exemption under Section 54F.
- Maximum deduction that can be claimed under this section is Rs.10 crore.
- Sale consideration which is not utilized for the purchase or construction of the new residential house shall be deposited before the due date of furnishing of the Income Tax Return, in Capital Gains Account Scheme.
