Tax on Agricultural Land Sale: If you are planning to sell arable land, then the most important question is: Will it have to pay a capital gains tax on it? The answer is a bit complex and it depends on where your land is and what work you are using. The rules for rural and urban agricultural land are different under the Income Tax Act.
Let us understand from experts when tax is levied on selling agricultural land and when not. Also, how can the tax exemption be availed.
No tax is not levied on the land of rural areas
If the land is located in the rural area and was being used for farming, it is not considered a capital asset. Therefore, tax is exempted from tax on its sale. However, there are some conditions for this. For example, the land should be at least 2 kilometers away from the boundary of the municipal or municipal corporation. The land has actually been used for farming. If these conditions are not met, the land will be considered a capital asset and the sale may be taxed.
Partner Vivek Jalan at the Tax Connect Advisory Services LLP says, “Cultivable land in rural areas in India is not considered capital asset under Section 45 of the Income Tax Act, 1961. Therefore, no benefit from its sale does not come in the category of ‘Capital Gain’. He says that such benefits have been considered as tax-free under Section 10 (1) of the Income Tax Act. However, it is necessary to show it in ITR’s Schedule EI (Exempt Income).
However, tax liability is not only decided by location, but it is also seen whether the land was actually being used for farming or not. If any agricultural land is being used for plotting or residential development, then it will not come in the category of tax exemption.
How is tax on agricultural land in the city?
If the cultivated land comes under the municipal, city council or any municipal corporation, then it is considered urban agricultural land. He is classified as a capital asset. In such a situation, it is necessary to pay capital gains tax on the benefits of selling land.
Tax expert CA Shefali Mundra in Cleartax says, “If urban agricultural land has been kept for more than two years, then the benefit from this will be considered as long -term capital gains.” According to the changes made in the Union Budget of 2024, it will be taxed 12.5% of Indexation Benefits.
According to Shefali Mundra, there are two options for assets purchased before 23 July 2024- 20% with indexation or 12.5% tax without indexation. If the land is kept for two years or less, the profit will be considered as short -term capital gains. In this situation, the income of the tax seller will be incurred according to the tax slab.
Can you get exemption from tax?
In certain situations, relief from capital gains tax can also be found on selling cultivated land in urban areas. Shefali Mundra says that the land seller can get a discount under Section 54B. But, the condition in this is that other agricultural land should be purchased within two years from the money received from selling the land. Also, under Section 54EC and 54F, discounts can also be given on the basis of circumstances.
Under Section 54EC, money received from selling land is to be invested, in government -authorized bonds (eg NHAI or REC). If you invest in them within 6 months, you can get tax exemption. However, its maximum limit is ₹ 50 lakh.
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