Demystifying Section 54B: Capital Gains on Sale of Agricultural Land

The Indian agricultural land is the backbone of its economy, providing employment to a significant portion of its population and producing food to feed the nation. As you read on, you’ll discover the importance of agricultural land in India and how it shapes the country’s identity.

Planning to sell your agricultural land? But what exactly are capital gains? 

Capital gain refers to the profit earned from selling a capital asset such as land or property. When it comes to selling agricultural land in India, there are specific tax laws that need to be taken into account. 

We will be covering the taxation related to the capital gains on the sale of agricultural land in India, which can be situated in rural or non-rural areas, with each location being subject to different tax rules. The transfer of a financial asset and any resulting gain or loss will be treated as a capital gain or loss. 

Understanding Agricultural Land: The Basics

There are two categories of agricultural land:

Rural Agricultural Land:

(a) Located within a municipality with a population of fewer than 10,000.
Read: Increase the Value of Your Home: Smart Strategies for 2024

(b) Located outside the municipality and meets the following criteria:

• Situated over 2 km away from the municipality’s local limits with a population of more than 10,000 but not exceeding 1,00,000.
• Situated over 6 km away from the municipality’s local limits with a population of more than 1,00,000 but not exceeding 10,00,000.
• Situated over 8 km away from the municipality’s local limits with a population exceeding 10,00,000.

Urban Agricultural Land:

Any agricultural land that does not meet the conditions specified for rural agricultural land.

Sale of Agricultural Land Taxability

In India, the taxability of the sale of agricultural land depends on the nature of the land and the purpose of holding it. Here’s what you need to know:

Tax on Sale of Rural Agricultural Land 

 If you hold rural agricultural land, it does not qualify as a capital asset. Therefore, no capital gains or losses arise on the transfer or sale of rural agricultural land.

Urban Agricultural Land

• If you hold urban agricultural land, it qualifies as a capital asset, and capital gains arising on its sale or transfer. 
• The nature of capital gains, whether long-term or short-term, will depend on the holding period of the asset.
•  If you hold the land for more than 2 years, it will be considered a long-term capital gain and taxable at 20%.
•  If the holding period is less than 2 years, the gain will be a short-term capital gain and taxable at the slab rate.

Holding Agricultural Land as Stock-in-Trade

If you regularly buy and sell agricultural land in the course of your business, holding it as stock-in-trade, then gains from the sale of such land are taxable under the head Business & Profession. In such cases, no capital gains will be chargeable on the agricultural land.

Capital Gain Exemptions on Sale of Agricultural Land [Section 54B]

When selling agricultural land in a rural area, no capital gains tax applies as it isn’t considered a capital asset. However, in non-rural areas, a common question arises: under which section can exemption be claimed for the sale of agricultural land? In non-rural areas, capital gains tax is applicable, but exemption can be sought under Section 54B of the Income Tax Act, 1961 if the following conditions are met:

• Only individuals or Hindu Undivided Families (HUFs) can claim the exemption.
• The land being sold must be agricultural land, whether it’s a long-term or short-term capital asset.
• The individual or their parents must have used the land for agricultural purposes for at least two years before the sale. For HUF, any member can use the land.
• The taxpayer must purchase another agricultural land within two years of selling the old one. If not, the capital gains amount should be deposited in the Capital Gains Account Scheme and withdrawn when purchasing the new land.
• If the new land is sold within three years of purchase, the tax exemption will be withdrawn, and the taxpayer will have to pay tax on the exemption claimed earlier.

Individuals and Hindu Undivided Families (HUFs) are eligible for exemption under Section 54B of the Income Tax Act, while companies, LLPs, and firms are not. The exemption amount is determined based on the lower cost of the new agricultural land or the capital gains from the sale of the old agricultural land. This exemption applies to both long-term and short-term capital gains, and it is applicable even if the new agricultural land is purchased in the name of another person, such as a spouse or child. Furthermore, the exemption remains valid even if the new agricultural land is acquired in a different state or in the same urban area where the old agricultural land was located. For precise calculations of the exemption amount, it is advisable to consult with a tax advisor who can consider individual circumstances.
Read: Steps in Selling a House: Sale Agreement, Rules and Regulation

Section 10(37) of the Income Tax Act, 1961

• Section 10(37) of the Income Tax Act, 1961 provides an exemption from capital gain tax on agricultural land on compensation received for compulsory acquisition of urban agricultural land, subject to the following conditions:
• The exemption is available only to individuals or HUF.
• It is applicable to capital gains arising from the transfer of agricultural land.
• The agricultural land must be situated within the jurisdiction of a municipality, municipal corporation, notified area committee or town area committee, or within a certain distance from these limits.

Population Limit	Distance Limit from Local Limits of Municipality
More than 10,000 but not exceeding 1 Lakh	Up to 2 km
More than 1 Lakh but not exceeding 10 Lakhs	Up to 6 km
More than 10 Lakhs	Up to 8 km

• The land must have been used for agricultural purposes for at least two years by an individual, their parents, or HUF.
• The transfer must be due to compulsory acquisition under any law or the transfer consideration must be approved by the Central Government or Reserve Bank of India.
• The compensation received must be after 1st April 2004.

Disclosure of Sale of Agricultural Land in ITR

Agricultural land used for farming may not necessarily be considered as such for income tax purposes. Only agricultural land situated outside city or town limits, based on population and distance, qualifies as agricultural land for taxation purposes. If your agricultural land meets the definition of agricultural land as per income tax laws, it is not treated as a capital asset for taxation purposes. 

Therefore, profits from the sale or transfer of this land do not count as income for tax purposes and do not need to be disclosed in the income tax return. Agricultural income, on the other hand, is considered an exempt income and must be disclosed in the income tax return to calculate the average tax rate. Profits made from the sale of agricultural land that is not a capital asset do not need to be disclosed in the income tax return.

Income Tax on Sale of Ancestral Agricultural Land

If you and your co-owners decide to sell your inherited land and make a profit, you will have to pay capital gains tax on the amount earned. The tax amount will be calculated based on the selling price or the stamp value, whichever is higher. The cost of acquisition will be determined based on the original purchase price or the fair market value of the land in 2001, whichever is greater.

To calculate the indexed cost of acquisition, you will need to multiply the cost of acquisition with the cost-inflation index for the year of sale. For example, if you sell the land in 2023, you would need to use the cost-inflation index for that year to calculate the indexed cost of acquisition.

The difference between the selling price and the indexed cost will be considered your long-term capital gain and will be taxed at a flat rate of 20%. However, you can potentially avoid paying this tax by investing the gains in a new house or bonds issued by NHAI or RECL, as outlined in Section 54F and Section 54EC of the tax code.

Who can claim on sale of agricultural land exemption under section 54B of the income tax act? 

Individuals and Hindu Undivided Families (HUFs) are eligible to claim the exemption under Section 54B of the Income Tax Act. However, companies, LLPs, and firms are not eligible for this exemption. Here are the conditions for claiming the exemption:

• The sold agricultural land must have been used for agricultural purposes by the individual or HUF for at least two years prior to the sale.
• The new agricultural land must be used for agricultural purposes.
• The new agricultural land must be purchased within two years from the sale of the old agricultural land.
• The exemption is limited to the lower of the capital gains from the sale or the cost of the new agricultural land.

What is the amount of exemption available under section 54B of the income tax act? 

The amount of exemption under Section 54B of the Income Tax Act is determined by the lower cost of the new agricultural land or the capital gains on the sale of the old agricultural land. Here are some additional pointers regarding the amount of exemption:

• The exemption is available for both long-term and short-term capital gains.
• The exemption is available even if the new agricultural land is purchased in the name of another person, such as a spouse or child.
• The exemption is available even if the new agricultural land is purchased in a different state or in the same urban area where the old agricultural land was located.
• It is important to consult a tax advisor to determine the exact amount of exemption based on individual circumstances.

TDS on Sale of Agricultural Land

Individuals are required to deduct a TDS rate of 1% on the sale/purchase of real estate property transactions if the transaction value exceeds 50 Lakhs. 

However, it is essential to note that the TDS rate mentioned in Section 194IA is not valid for agricultural land sale/purchase transactions. Even if the value of the agricultural land sale/purchase transaction is more than Rs. 50 Lakhs, TDS on Property will not be applicable. 

It is advisable to seek guidance from a tax expert or chartered accountant to ensure adherence to all relevant tax laws and regulations.

How can NoBroker help?

To summarise, if agricultural land is located in an urban area, it would be considered a capital asset and subject to capital gains tax upon its sale. Understanding the tax implications of selling agricultural land in an urban area is crucial to ensure compliance with tax laws and regulations and to maximise profits. 
NoBroker’s Real Estate Experts can assist you in understanding the legal obligations and procedures involved in real estate transactions. If you require consultation, simply leave a comment below the article, and one of our representatives will promptly get in touch with you to provide guidance and assistance.

FAQ’s

Subscribe