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.