Tax on Sale of Agricultural Land & Section 54B Exemption

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Agricultural Land is a land on which agricultural activities are carried out. This article focuses on the tax which would be levied on the capital gains arising on the sale of agricultural land in India.

An agricultural land may either be situated in a rural area or situated in a Non Rural area. The tax implication will differ in both the cases.

Capital Gains Tax on Sale of Agricultural Land in Rural Area

Rural Agricultural Land has been specifically excluded from the definition of Capital Asset as defined in Section 2(14). As Rural Agricultural Land is not considered as a Capital Asset – therefore Tax won’t be levied on sale of Rural Agricultural Land as it is only levied on sale of a Capital Asset.

As Rural Agricultural Land does not constitute a Capital Asset, therefore Capital Gains Tax is not levied on the sale of Rural Agricultural Land. This will apply irrespective of the value of the transaction and the capital gains tax on sale of agricultural land will not be levied in any case.

A confusion that arises here is that which land would be considered as Rural Land and which land would be considered as Non Rural Land. To remove this confusion, the govt has specifically defined which Agricultural land would be considered as Rural Land and which Agricultural land would be considered as Non Rural Land. This definition has been mentioned on Pg 13 of the Memorandum to the Finance Bill 2013 which can be accessed here.

feat - Agricultural Land

Capital Gains Tax on Sale of Agricultural Land in Non Rural Area

Agricultural Land situated in an Urban Area would be considered as a Capital Asset and therefore the Capital Gains Tax would be levied on the sale of Agricultural Land situated in non Rural Area.

Capital Gains Tax in such a case would be computed in the same manner as is computed on sale of any other property. The Cost of Acquisition and Cost of Improvement would be deducted from the Sale Price to arrive at the Capital Gains.

               Full Value of Consideration                                                           xxx

(Less)    Cost of Acquisition                                                                         (xxx)

(Less)    Cost of Improvement                                                                     (xxx)

                Capital Gains                                                                               xxx

For a detailed read on computation of Capital Gains, you may refer this article on Computation of Capital Gains on sale of Property in India.

TDS not applicable on Sale of Agricultural Land

From 1st July 2013, TDS @ 1% is required to be deducted on sale/purchase of transactions involving sale of Real Estate Property where the transaction value is more than 50 Lakhs.

However, Section 194IA for TDS on Property is not applicable on sale/purchase of agricultural land. Even if the transaction value is more than Rs. 50 Lakhs – TDS on Property will not be applicable on sale/purchase of agricultural land.

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

No Capital Gains will arise on the sale of Agricultural Land situated in a Rural Area as it is specifically excluded from the definition of Capital Asset. However, Capital Gains will arise on the sale of Agricultural Land situated in a Non Rural Area as explained above.

However, exemption can be claimed from such Capital Gains under Section 54B for investment in agricultural land. The new agricultural land purchased may either be Rural Land or Non Rural Land.

To claim exemption under Section 54B for Capital Gains arising on the sale of Agricultural Land, the following conditions are required to be satisfied:-

  1. Exemption under Section 54B can only be claimed by an Individual or by HUF.
  2. The asset transferred should be agricultural land. The land may be a long term capital asset or a short term capital asset.
  3. The agricultural land should be used by the Individual or his parents for agricultural purpose at least for a period of 2 years immediately preceding the date of transfer. In case of HUF, the land may be used by any member of the HUF.
  4. Within a period of 2 years from the date of transfer of old land, the taxpayer should acquire another agricultural land.
  5. If the new agricultural land is not purchased before the due date of the filing of the income tax return, the Capital Gains amount should be deposited in the Capital Gains Account Scheme which can later be withdrawn at the time of purchase of agricultural land.

After acquiring the new agricultural land, if the new agricultural land is transferred within a period of 3 years from the date of purchase, then the tax exemption allowed earlier would be withdrawn. In such a case, the assessee would be required to pay tax on the exemption claimed earlier.

Apart from exemption under Section 54B available for reinvestment in agricultural land, the seller can also claim Capital Gains exemption under Section 54EC by reinvesting in specified bonds. The seller can also claim exemption under Section 54F for reinvestment in a Residential House.

Other Relevant Points

  1. No Capital Gain would be chargeable to tax in case of an individual or HUF if the agricultural land is compulsorily acquired under any law and the consideration of which is approved by the Central Govt or RBI and received on or after 01-04-2004.
  2. Any Income arising from the sale of Agricultural produce is also not taxable in India.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.