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Capital gain on sale of agriculture land: 7 important points to know

Capital gain on sale of agriculture land is exempt if land is situated in rural area. Here, many inter related sectoins are covered to understand the topic. It is necessary to study section 2(14) -changes in definition of capital asset in financial bill, 2013, section 10 ( 37), section 45, section 54B, section 194LA. All these sections are covered in this article. I have presented theme in details for better understanding.

7 important points about capital gain on sale of agriculture land:

Capital gain on agriculure land held as investment:

 capital asset definition under section 2(14) and changes in definition of agriculture land:

To know definition of capital asset, we are required to understand section 2(14). There is amendment in section 2(14) in budget 2013.

As per section 2 ( 14),

capital asset means property of any kind held by assessee whether or not connected with his business or profession, but does not include

Agriculture land in India

not being a land situated

a)    In any area which is comprised within the jurisdiction of a municipality (whether known as 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 ten thousand [according to the last preceding census of which the relevant figures have been published before the first day of the previous year]; or

b)    In any area within the distance, measuredaerially,

(I)           Not being more than two kilometers, 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 kilometers, 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 kilometers, 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;

As per above definition,following land is agriculture land in rural area and is not capital asset:

  1. Land situated in area within municipality or juridiction where population is less than 10000.
  2. Where distance of land from municipality and populaiton limit is as under:

Distance from municipality

Population
Within 2 kilometers 10,000 to 1,00,000
2 km to 6 km 1,00,000 to 10,00,000
6 km to 8 km

More than 10 lakhs

Such distance should be decided as per distance on straight line aerially as crow file.

Capital gain applicability only when the  agriculture land is held as investment:

Remember that capital gain on sale of agriculture land will be applicable when land is capital asset . ( decide from the definition mentioned above) and held as investment. If land is not capital asset, capital gain will not be charged.

capital gain tax when agriculture land is held as stock :

When agriculture land is held as stock in trade ( The assessee has business of selling and purchasing properties like land, plot etc. ), capital gain tax will not be applicable but the profit should be charged as business income under head of ‘ profit and loss from business or profession’ head.

Applicability of stamp duty value concept while selling agriculture land under section 50C:

Agriculture land is immovable property. So while seeling agriculture land, section 50C will be applicable.

According to section 50C,

  1. If sale consideration received by assessee is less than stamp duty value, stamp duty value shall be considered as sale consideration.
  2. If assessee claims that stamp duty value is exceeding fair market value and that value is not disputed before stamp authority, assessing officer refers the case to valuation officer.
  3. Valuation officer determines the value, if it exceeds stamp duty value, that value shall be ignored. If that value is less than stamp duty value, this value should be used as fair market value.
  4. Remember that this provision will be applicable when agriculture land is held as investment and transferred by assessee.

 

Capital gain deductions available to save capital gains on sale of agriculture land:

Follwing are the deductions for income tax saving on sale of agriculture land.

Deduction u/s 54B:

  1. This deduction is available to reduce capital gain for transfer of agriculture land.
  2. The deduction is available to individual or HUF only.
  3. The deduction is available if the land is used by the individual or his parents or HUF members for period of two years prior to date of transfer.
  4. The capital gain received on this transfer should be invested in another agriculture land within 2 years from the date of transfer.
  5. The asset should be held by assessee for 3 years from the date of purchase. ( lock in period).
  6. If the assessee has transferred the asset within 3 years, capital gain exempted earlier should be used to reduce the cost of new asset while computing capital gain on sale of new asset.

Deduction under Section 54EC:

  1. Section 54EC is available to reduce burden of long term capital gain. So if your agriculture land is long term asset means held by you for more than 3 years before sale, you can take benefit of this deduction.
  2. The capital gain amount should be invested in bonds of NHAI and RECL within 6 months from the date of transfer.
  3. The maximum investment amount is Rs. 50 lakhs.
  4. The bonds should not be transferred within 3 years from the date of purchase. Addionally, you are not allowed to take any loan or advance on security of the bonds. If you breaks that condition, capital gain exempted earlier shall become taxable in the previous year when the bonds are sold or advane/loan is taken.

Deduction available u/s 54F:

  1. This deduction is available for long term capital asset other than residential house. So the deduction is available on transfer of land, jewellery, commercial property, agriculture land etc.
  2. The deduciton is available only to individual or HUF.
  3. To avail deduction, assessee should purchase residential house within 1 years before or 2 years after  from the date of sale of land or he should construct the residential house within 3 years from the date of sale.
  4. The assess should own only one house( except the newly purchased house) on the date of transfer of land.
  5. The assessee can avail deduction in the proportion of cost of newly purchsed house which it bears to total long term capital gain.
  6. The lock in period is 3 years so he is required to held the new house up to 3 years from the date of purchase/ construction. If he breaks this condition, capital gain exempted earlier shall be chargeable to tax in the year of transfer of new house.

 capital gain exemption on compulsory aquisition of aricultural land ( section 10(37):

Sometimes agriculture land is acquired by government compulosry. That time to save farmers from capital gain, the income tax act 10(37) comes into effect. When agriculture land is acquired by compolsory on or after 1/4/2004, compensation received or enhanced compensation received shall be exempt from tax if following conditions are satisfied:

  1. Such exemption u/s 10(37) is available only to individual or HUF.
  2. Agriculture land should be used by individual or his parents or by HUF during the preceding two years.
  3. Such acquisition is by central governemtn or by order of RBI or compulsory acquisition by any law.
  4. Such compensation should be received after 1/4/2004. If part of original compensation is received before 1/4/04 and another part is received after 1/4/2004, such exemption is not available. However, if enhanced compensation received after 1/4/2004, exemption is available for enhanced compensation.

 TDS provision u/s 194LA:

Financial bill 2013 brought new responsibility to deduct TDS at 1% while paying for purchase of immovable property (other than agriculture land) u/s 194LA when consideration is more than Rs. 50 Lakhs.

Agriculture land means agriculture land in India but does not include agriculture land which has been held as capital asset in item (a) and (b) of section 2(14)(iii) of income tax act.

So deduct TDS only when the agriculture land you have purchased is in specified area. Otherwise there is no need to deduct TDS. This provision is applicable for capital asset held as stock in trade or investment.

Final words:

Capital gain on agriculture land is applicable only when the land is in specified area. However, if land is held as stock in trade, the profit will be taxable as business profit. Check availability of exemption and deductions while calculating capital gain to reduce tax burden. Advice of expert is essential in this matter. I have tried to mention important points here. If you have any query, ask in comments. If this article is helpful to you, share this article on social media to say thanks.

52 Comments

  1. By vijay bende

    whether an amount received more in cash than the value mentioned in sale deed of agricultural land, can be considered an amount against the sale of agricultural land?

    • By admin

      No, it can’t be. But it can be covered under suppression of income and means avoidance of tax and invites to tax, interest and penalty.

  2. By HEMANT TALWAR

    Hi, Can you tell at what rate TDS be done on sale of Agriculture land held by NRI (through inheritance)to resident Indian.

    • By admin

      If land is not capital asset in item (a) and (b) of section 2(14)(iii) of income tax act, section 194LA will be applicable and seller needs to deduct tds at 1% on total sell value.

  3. By Sundarrajan

    Dear Mam,
    Greetings of the day..!

    My Mother is going to sell Agricultural land of 1acre inherited from her parents, by converting it into 22 plots costing 165 lakhs total.
    Help me to compute capital gain tax and exemptions by investing on other means.

    thanks n regards
    sundarrajan

    • By admin

      First, be sure about agriculture land sell is taxable or not – refer article fully.

      If sell is taxable, I have already written about investment details in this article.Invest as per section 54EC or section 54F.

      You can compute capital gain by using following formula.

      sale value

      Less indexed cost of aquisition

      Less conversion cost

      • By Raghav

        Madam, I have converted agricultural land into sites and sold them. Then I have purchased a residential house. Can I get exemption? Please help me.

      • By admin

        As per my view, You can not get exemption as you have converted the land in non agriculture land.However, you can get exemption u/s 54F.

  4. By Ketan Desai

    Madam, – Municipal Corporation has compulsorily acquired agriculture land (for public purpose) by Sale Deed and not by giving compensation. Section 10(37) is still applicable? I-tax Department has considered the same as sale and has initiated proceedings u/s. 147 and has raised tax demand. The dept has rejected claim of exemption u/s.10(37). The agriculture land is in city itself. Please provide judgments of Gujarat HC or Supreme Court if you can. Thanks

    • By admin

      As per my view, the municipal corporation has not given you compensation but purchase from you the land that’s why IT department has raised demand. THere is no case laws available with me.

  5. By Santhosh kumar

    Madam, My friend sold agricultural land with in 8 kms form the distance of muncipality is it taxable as a capital gain?
    it is not is investment and it is not is business o profession.

    • By admin

      It is capital asset and capital gain tax will be applicable.

  6. By yatin r. aut

    is it true that only persons who are only farmers by profession can avail capital gain tax exemption by selling his / her agricultural land ? if anybody is doctor by profession, sells his / her ancestoral agricultural land what will be implication of capital gain tax ?

    • By admin

      TO determine taxability, first decide whether land is capital asset. If it is not capital asset, no tax liability will be there. Otherwise sell is taxable.

      The question you asked related to exemption for compulsory acquisition of land and section 54B. Please read the article again, you will get the answer.

  7. By Nirav Kansagara

    If i have Agriculture Land and held as farming purpose only. What should be the Value shown in Balance sheet? Under Fixed Assets or Stock in Held or Investment?

    • By admin

      It is Fixed asset if your intention is to use it for farming purpose.

  8. When an agriculture land is long term capital asset which is in urban area is converted into housing plots for sale.Then income arise from such activity will be capital gain or Income from bussines or from proffession please explain me.If any please sent me the procedure for computation of Tax.Thanking you madam.

    • By admin

      When asset is converted into stock, the capital gain and business profit will be arisen when that stock is finally sold.Capital gain will be fair market value of asset ( on the date of conversion) Less indexed cost of land. When assessee sold the plots, income from business or profession will be due. Business profit will be sale value less fair market value of plots ( as on date of conversion).

  9. By nayan

    Dear Madam,

    Population should be checked of the area

    A. where land is situated
    B.Or population should be checked of the closest jurisdiction of a municipality area

  10. By vikesh

    If land is acquired from father which is inheritance the land is agriculture land is located in rural area and it sold, whether capital gain tax will be liable.

    • By admin

      If asset is situated in rural area and sold, it will not be considered capital asset and capital gain will not be applicable. No matter, the land is acquired in inheritance. ( Check eligibility of land as rural land first)

  11. When the income arise on sale of housing plots which is in urban area then the income arise is capital gain and as well as income from business.The housing plots is belongs to my father, mother and my grand mother, then the income arise on sale, that is capital gain and income from business.Can it be used to purchase agriculture land to his son’ s or not.If any either where to purchase that is in rural area or in urban area.Is it cause any problem relating to Tax purpose to the assesses.(ie. Father mother &grand mother).Thanking you madam.

  12. By Dominic Dominic

    I am an NRI (US Citizen now) trying to sell an inherited agricultural land in rural area in kerala. The buyer is an Indian Citizen. My understanding is that rural agricultural land is not considered Capital asset and therefore no capital gains tax. What about TDS? Do the buyer have to deduct tax at source or there is no tax liability? the village officer has certified that the land is agricultural and is more than 30 km from the Municipal limit.

    • By admin

      TDS should be deducted if amount exceeds threshold limit. ( no matter capital gain is exempt). However, you can get it back by filling income tax return. So dont worry about it. Only provide right PAN number and get TDS deduction certificate.

      You can read more at this article

      http://taxmasala.in/section-194ia/

    • By Amarjeet Kashyap

      weather on the sale ghasni capital gain tax is applicable or not.

  13. Hi mam, your article was very helpfull,thanks to your article. I had one doubt.
    I sold my two acres of agriculture land on 4th sep 2015.I got some cash, according to the law if my sale was taxable, I heard that if I purchase land with in two years then it won’t be taxable.untill I purchase new agriculture land where should I keep this amount with me or in any bank.? Please reply.

  14. By sri

    Hello mam, your article was very helpful..and i have one issue. we have land (inheriditery) in rural area that land will be acquired by the government because it will be gone under the irrigation project and they will pay some amount as a compensation. if i am going to invest that amount into stock market or to buy a house in urban area, is it taxable…if it is taxable…how much i need to pay?

  15. I want sale my home property for 35L at the same time want buy agriculture land for 35L. Shall i get tax exception from the both of transactions under 54B or 54F?

  16. By T.S.Gopinath

    Sir, We are Purchased rural Agri land from 2000. Still the land are agriculture land. Agri activity is going on. Due to our family problems we are decided to sale of agri land. Please tell me it is liable from Capital tax or not.

  17. i have sold agricultural land for Rs.6000000/- and used this amount for purchase of new agricultural land Rs.2500000 and remaining amount Rs.3500000 for house purchase. all are done within limitation. is it correct way

  18. My mother brother and I jointly purchased a plot of agricultural land in 1990. At that time it was outside municipal limits. It is now 2km from the municipal limits and residential costructions have come up all around. We want to sell the land. What will be our liability for capital gains tax?

  19. By SANJAY SOOD

    My son inherited agriculture land by way of Will. This land falls in the limits set from the municipality for capital gain purpose. The land came to the family in 1920 by way of 100 years lease from British Govt then. Subsequently in 1965 under Thekedari Abolition act the lease was terminated and Bhumidari rights were conferred on my family. Now he wishes to sell the land. For computing capital gain what acquisition value would be taken. Thanks.

  20. By narendra somaiya

    I have sold part of my agricultural land which is within municipal limit about 6 months ago. Now, I want to construct my own house on a part of the remaining land. What is the time limit within which I can construct the house and whether I can retain the proceeds from the sale in my savings bank account for purposes of construction or do I have to deposit it in some bond or with the government.

  21. By ROBIN MATHUR

    MAM HI HAVE A AGRICULTURE LAND BUT NOTHING DOING AGRICULTURE PROCESS. SO CAN I SAY THIS LAND IS AGRICULTURE LAND

    • By Kalyani

      Assessed inherited land from mother whether he can declare the same under HUF status

  22. By Anand

    I have an agriculture land in Poni area of Unnao (Uttar Pradesh). The aerial distance of the agriculture land is above 9 kms from Unnao Municipal Corporation and Kanpur Municipal Corporation (Aerial Distance as per Google Map). The 2011 Census of Unnao District has given a population of 31.08 Lakhs people however the Census of Poni area of Unnao District (where the agricultural land is situated) is given at 1078 people. Will this be considered a Capital Asset? Help is much appreciated.

  23. By Ajai Kumar

    I am going to sell the agriculture land in rural area within 8 kms of municipal limits,inherited by my brother and gifted to me two years back.Please guide about the liability of capital gains and also as to how it is going to be calculated?

  24. By Jaydeep Dalwadi

    I am having rural agriculture land on which we are taking N.A.( non agriculture) permission, whether capital gain will be applicable to me and if yes than can I claim deduction of 54B

  25. By Satyam

    Mam from where the distance should be calculated? Whatwill be the starting point either the outer limit of corporation or Munncipal office.

  26. By Rajan.W

    The urban agricultural land was notified to be acquired. However, the District Collector convened a meeting of the land owners when they agreed that if they got a better price they would execute sale deeds in favour of a special purpose vehicle (a fully owned State Govt Company) instead of going through the acquisition process. (If anyone did not agree, their land would still be acquired under land acquisition) The IT dept has taken the stand that transfer through sale deds do not amount to compulsory acquisition and hence refuse to allow 10(37) exemption. They cite a Kerala High Court case Inforpark Kerala v ACIT(TDS) 2010 187 Taxman 1 (Ker) to support their view. Sale deed or not, the land owner has no option byt to transfer the land to the Govt/Govt company.
    Is there a way to get 10(37) exemption?
    Thank you in advance!

  27. By H Goswami

    Hello Mam,

    Client has sold rural agriculture land & As per Sec. 2 (14) not a capital asset…..

    Then what will be disclosure requirements in return for sale of Rural Agriculture Land????

  28. By c.a A R Garg

    agricultural land situated outside notified area , beyond 8 k.m from municipal limit give some case laws of hon able High court

  29. By Shailesh Patel

    I am purchasing an agricultural land within 2 kms of city limits. You mentioned I need to deduct 1% TDS. But then will I have to obtain TDS number only for this transaction to pay the TDS deducted to the government?

    I would not need the TDS number again in future for any other purpose. Or is there any other easier way to pay the TDS to the government?

  30. By KANPURA

    Madam i purchase agriculture land in unspecified area & now convert in residential and sale. is it taxable, if taxable either capital gain or business profit

  31. By Aamir usmani

    Hi i have inherited agriculture land now i want to sale agricultural land by making plot . Do i have to pay tax on the money i recived from sale proceeds

  32. By mohit

    res mam
    I want to sell my agricultural land covering area 9.75 decimal (400 sq m) in Bihar. The Govt of Bihar has classified this area for Stamp duty purposes as developing land. As per Stamp duty circle rate the cost of land is about 18 lac.My land is in rural area but near the urban notified area,Am I liable for capital gain tax ,If so,then what are the best possible measures to save maximum tax .

  33. By yogen

    Hello Ma’am, I am farmer and I have a agricultural land owned by me for more than 30 years, part of which I intend to lease to a mining company for 99 years to construct a road for transportation of ore. I am expected to get 5 lakhs as total rent for 99 years and 80 lakhs as compensation towards for crop loss / damage since the surrounding agricultural land belongs to me will be affected. All payments will be made as one time settlement.

    Will income or capital gains tax applicable for me? If yes, then how much will it be? I would be very grateful if you can answer my query as I am not able to get any clear answer from other websites or my CA.

    Thank you very much in advance for the helpful article.

    • By admin

      Income tax on rent and compensation under the head of business income will be attracted.

  34. By pawan

    hello mam i am a farmer i have sold my agriculture land rs 194 lac which is situated in 2km from mc limit & gain long term capital gain tax ,i already have a residential house , can i take exemption under 54f or not,pls clearify it & if yes how much i invest ,i would be very thankful to u if u guide me thank u

  35. By Ashis Gandhi

    Is capital gain levied if at the time of purchase of agriculture land it was a rural agriculture land but at the time of sale it falls under minicipal jurisdiction and falls under the definition of capital asset.

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