Whether sale of agricultural land attracts capital gain tax

What is Agricultural Land?

 The land where activities such as growing of crops, nursery cultivation etc are being carried out is classified as agricultural land.

Sale of agricultural land in urban areas attracts capital gain tax.

 Following are considered as Urban Areas –

1. Land  situated within jurisdiction of a municipality having population of 10,000 or more ; Or
2. Land situated within 2 kms from a municipality having population between 10,000 and 1 lakh
3. Land situated within 6 kms from a municipality having population between 1 lakh and 10 lakhs
4. Land situated within 8 kms from a municipality having population more than 10 Lakhs

So, any land falling in the above criteria is considered as urban land and upon its sale, the owner of the land has to pay Capital Gain Tax. If the land is outside the specified area as mentioned above, it will be considered as rural agricultural land and the seller of such land needn’t pay any taxes.

 How to save taxes?

• Reinvest in agricultural Land: As per Section 54B of Income Tax Act, any capital gain arising from sale of urban agricultural land, shall be exempt from tax provided the assessee purchases another agricultural land (it can be either urban land or rural land) within 2 years from the date of sale. To avail tax benefit under this section, the land needn’t be held for 3 years. Even if the property is sold after 1 year of purchase, he can take the benefit.

• If the seller decides to reinvest but fails to find another property before the due date of filing income tax return, then he has to deposit the money equivalent to Capital Gain money in Capital Gain Account Scheme. This scheme is available in all banks. In case the seller fails to buy the property within 2 years, then he has to pay Income Tax. 

• Buy Residential house property and avail tax benefit u/s 54F.  Suppose the sale of urban agricultural land results in long term capital gain (long term means the property was owned by the seller for 3 years before the date of sale), then the seller can reinvest the money in residential house property.  Read here to know more about u/s 54F

• Invest capital gain bond and avail tax benefit u/s 54EC: If the sale of urban agricultural land results in long term capital gain, then the seller can invest capital gain amount upto Rs.50 lakhs per financial year. (To know more about Capital Gain bond Read here)

Can the seller take the tax benefit from all the three sections simultaneously?

Yes, Certainly. For example, Mr. Ramaiah earns capital gain of Rs.3 Crores by selling urban agricultural land. He can invest Rs.50 Lakhs in Capital Gain Bond, Rs.1 Crore in agricultural land (urban or rural), and Rs.1.50 Crore in a flat / residential house. Thus, he needn’t pay any taxes, as he has reinvested the entire capital gain in different tax saving provisions of the Act.

Whether filing Income Tax Return is compulsory?

• As I said earlier, Sale of rural agricultural land is exempt from tax and hence there is no need to file Income Tax return

• If the sale is urban agricultural land, then the seller of the land has to file income tax return. 

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