Sale of Agricultural land: Taxation & TDS provision

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Sale of Agricultural land: Taxation & TDS provision

 

Query]

  1. There appears to be lot of confusion with regard to the TDS applicability on sale of agricultural land. Please clarify whether TDS is required to be done on purchase of agricultural land or not? Whether income on sale of agricultural land can be saved if in purchase another house property? [KS]
  2. Please guide with regard to the capital gain tax on sale of agricultural land which is situated around 4km from katol, District Nagpur. Please clarify other related tax issues & tax saving options over it.

 

 Opinion:

Normally, all income & gain arising on sale of property is taxable. However, income arising on sale of agricultural land is totally tax free provided that

(a) it is rural agricultural land & (b) it is used for agricultural purposes.

Rural Agricultural Land:
Rural agricultural land is not considered as “Capital Assets” & hence no tax is payable on sale of Rural Agricultural Land. An agricultural land is considered as rural agricultural land if it is not situated in any area within the distance (measured aerially) of not more than:
a] 2 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
b] 6 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
c] 8 Kms, from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

Above benefit of tax exemption is not available to profit arising on sale of (a) urban agricultural land or (b) non-agricultural land.

Agricultural Usage:
Use of rural agricultural land for agricultural purposes is one of the criteria for claiming income as exempt. The revenue records and other documents should reflect the land usage as such.  Agricultural income in the earlier ITR provides additional evidence in support of the usage of land for agricultural purposes.

Tax saving options:

The profit on sale of urban or non agricultural land would be taxable under the head “Capital Gain”. However, even if taxable, there are 3 easy tax saving option available for claiming the income as exempt:

 

i] Exemption u/s 54B:
Tax on income arising from sale of urban agricultural land can be saved u/s 54B by purchasing another agricultural land. For exemption, an amount of capital gain is required to be invested towards purchase of another agricultural land within 2 years from the date of sale. Exemption u/s 54B is available only if the agricultural land sold was used for agricultural purposes by assessee himself or his parents or his HUF for 2 years immediately prior to sale.

ii] Exemption u/s 54F:
To claim an exemption u/s 54F, taxpayers have to invest net sale consideration towards purchase/construction of another house property within a prescribed time frame. The prescribed time periods are as under:
a] For purchase:

One year before or two years after the date of sale.
b] For Constructions:
Three years from the date of sale.

There are two more conditions for exemptions u/s 54F, as under:
a) Taxpayer should not own more than one house property, other than the new asset, on the date of transfer of the original asset.
b) Taxpayers should not purchase any residential house, other than the new asset, within a period of two years after the date of transfer of original asset or construct any other residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.

iii] Exemption u/s 54EC:
For exemption u/s 54EC, taxpayers have to invest the amount of LTCG within a period of 6 months from the date of transfer in specified bonds issued by NHAI / REC. These capital gain tax saving bonds have a lock-in-period of 5 years. However, there is a ceiling of Rs. 50 Lakh for exemption under section 54EC.

Scheme of Deposits: 
Taxpayer is allowed a time period of 2 years & 3 years period for investment u/s 54B & 54F. However, if the amount is not utilized for purchase/ construction before the due date of filing ITR of the relevant year in which capital gain is earned then the amount is required to be segregated by keeping it in Capital Gain Deposit Accounts Scheme-1988 (CGDAS). Amount from CGDAS could be utilized subsequently for purchase or construction.

Applicability of TDS Provision on Agricultural Land:

Under section 194IA, TDS @1% is required to be done on the amount of sale consideration or stamp duty valuation, whichever is higher. However, TDS shall be required to be done only if the agricultural land is an urban agricultural land. No TDS shall be applicable if the agricultural land sold is a rural agricultural land.

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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road
Nagpur-440008.

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