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Sale of Agricultural Land: Income Tax Provision
Any profit from sale of Rural agricultural land in India is tax free. It must be carefully noted that the profit on sale of Urban agricultural land Is not tax free but will be taxable. Agricultural Land in Rural Areas in India is not considered a capital asset. Therefore, any gains from its sale are not taxable under the head Capital Gains.
There is no specific definition of Rural agricultural land in the Income Tax Act-1961. But it is used for convenience as Income Tax Act indirectly categorises agricultural land in two parts
- Rural Agriculture Landand
- Urban Agriculture Land’.
Rural Agricultural Land:
Rural Agricultural land is used so as to convey that the agricultural land is not a capital asset.
As per Section 2(14) of the Income Tax Act, 1961 Capital Assets does not include following agricultural land:
“agricultural land in India, not being land situate-
(a) In an area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than then thousand; or
(b) In any area within the distance, measured aerially-
(i) Not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(ii) Not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
(iii) Not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.
Explanation- For the purposes of this sub-clause, “population” 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.”
In short, income arising from sale of following agricultural land in India will not be taxable.
(a) If situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or
(b) If situated outside the limits of municipality, then situated at a distance measured-
(i) more than 2 kms, from local limits of municipality and which has a population of more than 10,000 but not exceeding 1,00,000; or
(ii) more than 6 kms, from local limits of municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
(iii) more than 8 kms, from the local limits of the municipality and which has a population of more than 10,00,000.
All land except above will be treated as urban Agricultural Land and so will be taxable like any other land.
- Held as stock in trade:
If the agricultural land in rural or urban areas is held as stock in trade then the sale of such lands results in business income.
- Exemption in case of Compulsory Acquisition of Urban Agricultural Land:
Urban agricultural land is although a capital asset but any capital gain arising from the compulsory acquisitionof such land shall be exempt as per Section 10(37) of the Income Tax Act, 1961, if following conditions mentioned in that section are satisfied.
- Such land should be an Urban Agricultural Land.
- During the period of two years immediately preceding the date of transfer, such land was being used for agricultural purposes by HUF or individual or his parents.
iii. Transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.
- Income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April 2004.
Capital Gain Exemption on transfer of Urban Agricultural Land:
Exemption under Section 54B of the income Tax Act, 1961, is available in respect of capital gains arising from transfer of agricultural land if the following conditions are satisfied:
- The exemption is available to an Individual or a HUF.
- Land which is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for a period of two yearsimmediately before the date of transfer.
- The amount of Long Term Capital Gain is used for purchase of another land for the agricultural purpose (may be Rural or Urban) within a period of two years from the date of transfer of this land.
- New agricultural land purchased to claim capital gains exemption should not be sold within a period of three yearsfrom the date of its purchase.
- It may be noted that in case assessee is not able to purchase agricultural land before the date of furnishing of Income Tax Return u/s 139 – the amount of capital gains must be deposited before the date of filing of return in any bank or institution specified according to the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount which is deposited.
- In case the amount which was deposited as per Capital Gains Account Scheme is not used for the purchase of agricultural land then it shall be treated as the capital gain of the year in which the period of two yearsfrom the date of sale of land expires.
- If investment is done then the amount of exemption from Capital Gains u/s 54B shall be as under:
If cost of new Agricultural Land is equal or greater than capital gains, then entire capital gains is exempt. Moreover, if the cost of new Agricultural Land is less than capital gains, capital gains to the extent of the cost of new agricultural land shall be exempt from tax.