Any gain or loss arising from transfer of Capital Asset shall be considered as a Capital Gain or Loss as the case may be. Section 45(1) of the Income Tax, 1961, is charging section and provides that-
‘Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EB, 54F, 54G and 54H, be chargeable to income tax under the head ‘Capital Gain’ and shall be deemed to be the income of the previous year in which the transfer took place.’
Agriculture Land in India
As per Income Tax Act, there are two types of Agriculture Land in India that is ‘Rural Agriculture Land’ and ‘Urban Agriculture Land’. Therefore, it is very important to understand the meaning of ‘Rural Agriculture Land’ and ‘Urban Agriculture Land’.
Agricultural Land in Rural Area in India is not considered a capital asset. Therefore, any gains from its sale are not taxable under the head Capital Gains. As per Section 2(14) of the Income Tax Act, 1961 Capital Assets does not include-
“agricultural land in India, not being land situate-
(a) In an area which is comprised within the jurisdiction of a municipality (whether known as a 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 then thousand; or
(b) In any area within the distance, measured aerially-
(i) Not being more than two kilometres, 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 kilometres, 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 kilometres, from the local limits of any municipality or cantonment board refereed 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.”
Rural Agricultural land.
It means an agricultural land in India –
(a) If situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or
(b) If situated outside the limits of municipality, then situated at a distance measured-
(i) more than 2 kms, from local limits of municipality and which has a population of more than 10,000 but not exceeding 1,00,000; or
(ii) more than 6 kms, from local limits of municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
(iii) more than 8 kms, from local limits of municipality and which has a population of more than 10,00,000.
Urban Agricultural Land.
Urban Agricultural Land is a land located in specified location i.e. not a Rural Agricultural Land and used for agricultural purposes.
Taxability of sale of Agriculture Land in India
Sale of land can result in two kinds of incomes. If the land is held as stock in trade then the sale of such lands results in business income.Whereas, if the land is held as investment then the income on the sale of the land results in Capital Gain.
Rural Agricultural Land: A Rural Agricultural Land does not qualify to be a capital asset, hence no capital gains/loss arise on sale or transfer of Rural Agricultural Land.
Urban Agricultural Land: An Urban Agricultural Land qualifies to be a capital asset, hence capital gains shall arise on sale or transfer of urban agricultural land. Nature of capital gain like long term or short term will depend upon the no. of years asset is held by the assessee. If the period of holding is more than 2 years then the capital gain arising will be termed as long-term capital gain. If the holding period is shorter than 2 years, then the gain arising is termed as short-term capital gain. Long term capital gain shall be taxable at 20% whereas short term capital gain is chargeable at slab rate.
Holding Agricultural Land as Stock-in-Trade: If you are into buying and selling land regularly or in the course of your business, i.e., if you hold agricultural land as stock in trade then in such a case, any gains from its sale are taxable under the head Business & Profession, i.e., no capital gains shall be chargeable on such agricultural land.
Exemption in case of Compulsory Acquisition of Urban Agricultural Land: Urban agricultural land is although a capital asset but any capital gain arising from the compulsory acquisition of such land shall be exempt as per Section 10(37) of the Income Tax Act, 1961, if certain conditions mentioned in that section are satisfied.
Conditions to be satisfied for claiming exemption from Capital Gains u/s 10(37)–
1. Such land should be an Urban Agricultural Land.
2. Such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by HUF or individual or his parent.
3. Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.
4. Such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April 2004.
Exemption in other case of transfer: The exemption under Section 54B of the income Tax Act, 1961, is available in respect of capital gains arising from transfer of agricultural land. This exemption is available when capital gain arising on sale of Urban Agriculture Land (as Rule Agricultural Land is not Capital Assets) & such capital gain is used for another agriculture land.
Conditions to be satisfied for claiming exemption from Capital Gainsu/s 54B–
1. The exemption is available to an Individual or a HUF.
2. The land which is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for a period of two years immediately before the date of transfer.
3. Another land for the agricultural purpose(whether Rural or Urban) should be purchased within a period of two years from the date of transfer of this land.
4. The new agricultural land which is purchased to claim capital gains exemption should not be sold within a period of three years from the date of its purchase.
5. In case assessee is not able to purchase agricultural land before the date of furnishing of Income Tax Return u/s 139 – the amount of capital gains must be deposited before the date of filing of return in any bank or institution specified according to the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount which is deposited.
6. If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land – it shall be treated as the capital gain of the year in which the period of two years from the date of sale of land expires.
Amount of exemption from Capital Gains u/s 54B– If cost of new Agricultural Land is equal or greater than capital gains, then entire capital gains is exempt. Moreover, if cost of new Agricultural Land is less than capital gains, capital gains to the extent of thecost of new agricultural land is exempt.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.