Agriculture Land and Capital Gains

If you are selling agriculture land, don’t assume that you are free from the capital gains. Agriculture land will attract the capital gains tax on certain scenarios. In my earlier articles, I have explained about capital gains, capital gains on agriculture land and capital asset. When looking in to the responses posted for this articles, most of the readers are confused about the capital gains calculation for the agricultural land. In fact, our income tax law itself not very clear on few points related to the capital gains on agriculture land. In this post, I will summarize the important facts on the subject in very simple language. Hope this would be beneficial for you to understand taxing on capital gains and agricultural land. If you have doubts, please share with us in the comments section.

When agriculture land is capital asset?

It is important to note that capital gains are levied only if the said property is fall under the capital assets. We are not going to discuss more about the capital assets in general, rather we discuss in respect to the agricultural land. If the said land is not fall under capital asset, then there is no question on levying the capital gains. There won’t be any tax and the sale amount can be used for buying any property.

• Should I pay taxes for capital gains?
• What is capital gains account scheme?

Section 2(14) of the income tax act defines the conditions used for determining the agriculture land as the capital asset. It states that,

• Agricultural land situated within a municipality or cantonment and the  population of that municipality or cantonment is more than 10,000 as per the last census. (or)
• Agricultural land situated within an area from local limit of municipality or cantonment are as notified by government in this regard.

If any one of the above condition is satisfied, said land is considered as the capital asset. Till now everything is good, but in some cases, the first condition is fulfilled and second condition is not fulfilled, then it is not considered as the capital asset.

Let us take one example, in the state of Haryana, agriculture land situated within 8Kms of municipal corporation of Fardabad is capital asset, the agricultural land situated within only 5Kms from the municipality in Bhiwani is considered as capital asset.

Why I have given the above example, when you selling the agricultural land, don’t take the first two conditions as the only thump rule for deciding the capital asset. Talk to the local bodies to see if the said land is situated in the notified area. Otherwise it will not be considered as the capital asset.

When should pay the capital gains on agricultural land?

• If your land is considered as the capital asset by the above conditions, you have to sit with your tax consultant and calculate the tax liabilities on your transactions.
• If the said land is not a capital asset, there is no capital gains for the sale. That means, you need not worry anything about the tax liabilities for that transactions. The whole transaction is exempt from the tax.

Tax Exemption on Capital Gains (Agricultural Land)

Under Income Tax act 1961, section 54B and 54F deals with the tax exemption on capital gains arising on selling the agricultural land.

Section 54B (Invest on agricultural land)

• Section 54B, when assessee  wants to show the tax exemption for the capital gains arising on agricultural land by investing on the agricultural land.
• Capital gains arising on transfer of agricultural land sold was used for the agricultural purposes will not be charged capital gains if the gain amount is invested in buying the agricultural land.
• Here the condition  is, the land should have been used for the agricultural purpose by assessee or his/her parents, immediately preceding two years from the date of sale.
• The new land (new investment) has to be purchased within two years from the date of selling agricultural land.
• Note that, assessee needs to invest in agricultural land only the capital gains not the actual sale amount of the property.  Assessee must calculate the capital gains and invest only that amount for the exemption.

Section 54F (Invest on residential property)

• Section 54F, when assessee  wants to show the tax exemption for the capital gains arising on agricultural land by investing on the residential property.
• The main difference between section 54B is, assessee  has to invest the net sale amount on the residential house to claim the full tax exemption. Not the capital gains.
• If you have bought a new house before one year from the date of transfer and within two year from the date transfer is valid for the tax exemption.
• If you are constructing the new house, you have to complete within three years from the date of transfer. Another important point is that, it is not necessary that you must start the construction only after the sale of land, you would have started earlier also, still it is applicable for the tax exemption.
• Investing on anything other than the residential house not covered for the tax exemption. If assessee  buying commercial property by selling the agricultural land, then assessee  can not claim any tax exemption.

Summary

I hope this article would have been more useful to get the clear understanding on capital gains arsing out of agricultural land. If i have missed any important points in this post, please post it in the comments section. When your are investing in the new property for the tax exemption, in that period sale amount can be deposited into the capital gains account scheme. It will fetch interest amount till you have time to invest in new property. Thank you for reading my blog!! If you have any doubts, please post it in the comments section.

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