Taxation on Agriculture Land in India as per Income Tax Act 1961

Summary: Taxation on agricultural land in India is governed by the Income Tax Act, 1961, which defines agricultural land based on its location relative to municipalities or cantonment boards. If the land is situated within 2 kilometers of a population greater than 10,000, or within specific distance and population criteria, it may not qualify as agricultural land for tax purposes. Long-term capital gains on agricultural land held for over 2 years are taxed at 20% with indexation benefit or 12.5% without indexation, effective from July 23, 2024. Short-term capital gains are taxed at regular slab rates if held for less than 2 years. Exemptions on the sale of agricultural land include compensation received under Section 10(37), which is tax-exempt if the land was used for agricultural purposes in the last 2 years before transfer. Section 54B offers tax relief for individuals or Hindu Undivided Families (HUFs) who sell agricultural land and buy new agricultural land within 2 years. If the new land’s cost is less than the capital gains, the difference is taxable. Additionally, under the Capital Gains Account Scheme, the exemption can still be claimed if the new land is purchased within the required timeframe but before filing the tax return.

Meaning of agricultural Land 

It means an agricultural land in India –

(a) If situated in any area which is comprised within the jurisdiction of a municipality or a cantonment board and its population is less than 10,000, or

(b) If situated outside the limits of the municipality or a cantonment board, then situated at a distance measured-

Capital Gain on Sale of Agricultural Land :

Long-term capital gain – If the agricultural land is held for more than 2 years then the tax rate is as follows:

• Before 23rd July 2024: 20% with indexation benefit
• From 23rd July 2024: 12.5% without indexation benefit or 20% with indexation benefit whichever is beneficial.

Short-Term capital gain – If the agricultural land is held for less than 2 years then it is taxed at slab rates.

Exemption on the Sale of Agricultural Land:

• Under Section 10(37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of  agricultural land is exempt from tax. You can declare the same under Schedule EI of your Income tax return.

Condition to claim exemption u/s 10(37):

• Land should be agricultural land
• Such land should be used for agricultural operations in the preceding 2 years before such transfer by individual or his parents or HUF

If agricultural land is situated outside the prescribed limit then tax exemption can be claimed under Section 54B of the Income Tax Act when the following conditions are fulfilled:

• The exemption is available to an Individual or a HUF.
• The land that is being sold must have been used for agricultural purposes by the individual or his parents or by the HUF for 2 years immediately before the date of transfer.
• Another land for agricultural purposes should be purchased within 2 years from the date of transfer of this land.
• The new agricultural land that is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase.
• In case you are not able to purchase agricultural land before the date of furnishing of your Income Tax Return – the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except the rural branch) of a public sector bank according to the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount which is deposited.
• 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 2 years from the date of sale of land expires. Of course, in this case, you can withdraw these amounts for any use you may want.

Amount of Exemption:

• If the cost of the new agricultural land purchased >  capital gains, entire capital gains are exempt.
• If the cost of the new agricultural land purchased < capital gains, Capital Gains less(-) cost of the new agricultural land = capital gains chargeable to tax

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