The transfer of a capital asset is considered a capital gain or loss, depending on the circumstances. The charging section of the Income Tax Act of 1961, Section 45(1), states 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

According to Personal Duty Act, there are two kinds of Agribusiness Land in India that is ‘Country Farming Area’ and ‘Metropolitan Horticulture Land’. As a result, knowing what “Urban Agriculture Land” and “Rural Agriculture Land” mean is critical.

In India, agricultural land in rural areas is not regarded as a capital asset. As a result, capital gains from its sale are not subject to taxation. According to Income Tax Act Section 2(14), 1961 Capital Assets do 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

Offer of land can bring about two sorts of earnings. The sale of such lands generates revenue for the business if they are held as stock in trade. The income from the sale of the land, on the other hand, is called capital gain if the land is held as an investment.

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.

Land for Urban Agriculture: 

Because urban agricultural land is considered a capital asset, when it is sold or transferred, capital gains are realized. The type of capital gain—long-term or short-term—will be determined by the answer. the assessee owns the asset for years. The resulting capital gain will be referred to as long-term capital gain if the holding period is longer than two years. The gain is referred to as short-term capital gain if the holding period is less than two years. Short-term capital gain is subject to a slab rate, while long-term capital gain is subject to 20% taxation.

Using agricultural land as a commodity: 

If you buy and sell land on a regular basis or as part of your business, such as holding agricultural land as stock in trade, then any gains from its sale are taxable under the heading “Business & Profession,” and there will be no capital gains tax on the agricultural land.

Exemption for Urban Agricultural Land Acquisitions Required by Law: 

Metropolitan horticultural land is albeit a capital resource yet any capital increase emerging from the obligatory procurement of such land will be excluded according to Segment 10(37) of the Personal Duty Act, 1961, assuming specific circumstances referenced in that part are fulfilled.

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.

FAQs

Is agriculture land taxable?

The issue is taxability of Agriculture Land. Broadly, there are two categories, For Income Tax purpose, in which the agriculture land can be divided in to following two parts. Urban Agriculture Land: Urban Agriculture Land is a capital assets under the Income Tax Act and is taxable like other assets.

Are capital gains on compulsory acquisition of agricultural land exempt from tax?

Under Section 10 (37) of the Income Tax Act, Capital Gains on compensation received on compulsory acquisition of urban agricultural land is exempt from tax. Let’s take a look at what are the exemptions available on capital gains on the sale of agricultural land. The exemption is available to an Individual or a HUF.

What is taxable income arising from sale of agricultural produce?

Through the sale of such agricultural produce: Where the produce does not undergo ordinary processes employed to become marketable, the income arising on sale would generally be partly agricultural (exempt) income and part of it will be non-agricultural (taxable) income.