Capital Gains on Sale of Agricultural Land

Introduction

Agricultural land is a significant asset in India, providing employment to many people and producing food to feed the nation. From an income tax perspective, agricultural land is classified into two types: Rural Agricultural Land and Urban Agricultural Land.

Rural Agricultural Land

Rural Agricultural Land in India is not considered a capital asset. Therefore, any gains from its sale are not taxable under the head Capital Gains. As per Section 2(14) of the Income Tax Act, 1961, Capital Assets does not include agricultural land in India.

Definition of Rural Agricultural Land

Rural Agricultural land is defined as an agricultural land in India that is situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or if situated outside the limits of the municipality, then situated at a distance measured:

• 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

• 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

• More than 6 kms, from local limits of municipality and which has a population of more than 10,00,000.

The distance is to be measured aerially and from the boundary of the municipality in direction of Agricultural Land.

Urban Agricultural Land

If the agricultural land does not satisfy the conditions of rural agricultural land, then it will be considered urban agricultural land.

Capital Gain on Sale of Urban Agricultural Land

Urban agricultural land (land which is not rural land) is considered a capital asset. The taxability of Urban Agriculture land is as follows:

• Long-term capital gain: Holding Period greater than 2 years and tax @ 20% will be levied after considering the indexation benefit.

• Short-Term capital gain: Holding Period less than 2 years and tax @ Slab rates will be levied2.

Exemptions on Sale of Urban Agricultural Land

Under Section 10(37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of urban agricultural land is exempt from tax. You can declare the same under Schedule EI of your Income tax return.

The provisions of section 10(37) is reproduced as under-

“(37) in the case of an assessee, being an individual or a Hindu undivided family, any income chargeable under the head "Capital gains" arising from the transfer of agricultural land, where—

(i) such land is situate in any area referred to in item (a) or item (b) of sub-clause (iii) of clause (14) of section 2;

(ii) such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his;

(iii) such 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;

(iv) such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April, 2004.

Explanation.—For the purposes of this clause, the expression "compensation or consideration" includes the compensation or consideration enhanced or further enhanced by any court, Tribunal or other authority;”

However separate exemptions have been provided Under Section 96 of RFCTLARR Act.

Exemption Under Section 96 of RFCTLARR Act on Compulsory Acquisition of Land

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) came into effect from 1st January, 2014. This act provides a framework for land acquisition in India, ensuring fair compensation to those whose land is taken away, transparency in the process of acquisition of land, and adequate measures for rehabilitation and resettlement of affected persons.

Section 96 of RFCTLARR Act

Section 96 of the RFCTLARR Act provides that income tax shall not be levied on any award or agreement made under this Act. This means that the compensation received for compulsory acquisition of land under the RFCTLARR Act is exempted from the levy of income tax.

However, this exemption does not apply to awards or agreements made under section 46 of the RFCTLARR Act. Section 46 deals with land purchase by non-government/private parties through the RFCTLARR Act.

Implication of the Exemption

The implication of this exemption is significant for landowners. If a landowner’s land is compulsorily acquired under the RFCTLARR Act, the compensation they receive will not be subject to income tax. This can result in substantial tax savings for the landowner.

It’s important to note that this exemption applies only to compulsory acquisition of land under the RFCTLARR Act. If the land is sold voluntarily or acquired under a different law, the compensation may be subject to income tax.

Does this mean that section 10(37) has become meaningless-

Section 10(37) and Section 96 of the RFCTLARR Act serve different purposes and apply to different scenarios, so the introduction of Section 96 does not render Section 10(37) useless.

Section 10(37) of the Income Tax Act provides an exemption on capital gains arising from the compulsory acquisition of urban agricultural land. This exemption is available only to an individual or a Hindu Undivided Family, and several conditions must be met.

On the other hand, Section 96 of the RFCTLARR Act provides that income tax shall not be levied on any award or agreement made under this Act. This means that the compensation received for compulsory acquisition of land under the RFCTLARR Act is exempted from the levy of income tax.

Therefore, both sections can coexist and provide tax benefits in different scenarios.

Exemption u/s 54B and 54EC-

Certain other exemptions in the form of deduction from the taxable capital gain is provided under these sections, Indepth discussion shall be made on these sections through a separate article.

Conclusion

The taxation of the sale of agricultural land in India is dependent on whether the land is classified as rural or urban. While the sale of rural agricultural land is not subject to capital gains tax, the sale of urban agricultural land is taxable. Understanding these nuances is crucial for landowners to ensure compliance with tax laws and to plan their taxes efficiently.