Farmers, landowners, and investors in India value agricultural land as one of their assets. The sale of farmland can also yield a lot of money, particularly when the price of land goes up over time. Nevertheless, it is vital to comprehend the tax impact of such a transaction prior to making a sale.
The capital gain on agricultural land is calculated based on the area where the land is located, the ownership of the land, the time of holding, and the income tax rates applicable. Unlike in other cases where land transactions relating to agriculture are not taxed as capital gains tax, others may be heavily taxed.
This article describes the tax on agricultural land sale in Maharashtra, exemptions, reinvestment allowances, and other considerations landowners need to be aware of.
Understanding Capital Gain on Agricultural Land
The profit earned after selling an asset of capital at a higher price than the purchase price is known as capital gain. In the case of farmland, the capital gain is calculated as the difference between the selling price of the farmland and the cost of purchase, without modifications concerning some allowed expenses.
But all capital gains on the sale of agricultural land by a company do not attract capital gains tax.
The definition of the capital asset under the Income-tax Act, 1961, includes generally rural agricultural land in India. Its sale, therefore, is not subject to capital gains tax. Urban agricultural land, on the other hand, may qualify as a capital asset and become taxable when sold.
Rural vs Urban Agricultural Land
The classification of agricultural land is primarily based on its location and distance from municipal or cantonment board limits. Agricultural land is generally treated as rural when it is situated outside specified municipal limits and the prescribed aerial distance thresholds.
The distance criteria depend on the population of the municipality:
- Up to 2 kilometres for municipalities with a population exceeding 10,000 but not exceeding 1 lakh.
- Up to 6 kilometres for municipalities with a population exceeding 1 lakh but not exceeding 10 lakh.
- Up to 8 kilometres for municipalities with a population exceeding 10 lakh.
Land falling within the relevant limits may be treated as urban agricultural land and subject to capital gains tax. Therefore, determining whether the property qualifies as rural or urban agricultural land is the first step in calculating tax liability.
Tax on Agricultural Land Sale
The tax on agricultural land sale is based on the fact whether the land is a capital asset and how long it has been held. When the land is classified as a capital asset, the resulting gain can be categorised as a short-term or long-term capital gain.
Short-Term Capital Gains
When agricultural land is held for not more than 24 months prior to sale to a third party, the gain is usually considered a short-term capital gain. Capital gains during a short period are normally subject to income tax rates of the slab being paid by the taxpayer.
Long-Term Capital Gains
When the farmland is held over a period of 24 months, the profit is usually declared as the long-term capital gain. In the case of eligible transfers, the general long-term capital gains rate is now 12.5% without indexation. Resident persons and Hindu Undivided Families (HUFs) might have a choice of applying the previous 20% with indexation of qualifying land or building that was acquired before July 23, 2024, and transferred on or after that date.
Tax Advantage of Agricultural Land Under Section 54B
The exemptions provided under Section 54B of the Income Tax Act, 1961 are one of the greatest tax advantages of agricultural land. This exemption is provided to individuals and HUFs who are eligible to take an exemption on the capital gains noted when a person sells agricultural land, and the proceeds are used to purchase another agricultural property.
To claim the exemption, the following conditions generally apply:
- The initial land had to be actively used as agricultural land at least biannually before its sale.
- The land must have been utilized by the individual or his or her parent or the HUF, as required.
- Within the transfer of the taxpayer, he or she must purchase another piece of farmland within two years.
- The exemption is on the capital gain allowed according to the investment in new agricultural land or the amount invested in the new agricultural land, whichever is less.
For example, suppose a landowner earns a capital gain of ₹15 lakh after selling agricultural land. Assuming they spend ₹12 lakh in buying another qualifying agricultural property, the exemptions could be capped to ₹12 lakh. The remaining ₹3 lakh may remain taxable.
Long Term Capital Gain on Sale of Agricultural Land
The long-term capital gain on sale of agricultural land is applicable in case the property constitutes a capital asset and has been in its possession for a period of more than 24 months.
The gain is usually determined by subtracting the relevant acquisition cost, the cost of qualifying improvement expenses, and the cost of transfer-related expenses from the proceeds of the sale.
For example:
| Particulars | Amount |
|---|---|
| Sale consideration | ₹50,00,000 |
| Cost of acquisition | ₹20,00,000 |
| Eligible expenses | ₹2,00,000 |
| Long-term capital gain | ₹28,00,000 |
The corresponding gain is exempt as provided in Section 54B, provided that the taxpayer fulfills the specified requirements. It should also be noted that the various taxable amounts can vary depending on the classification of the property, date of acquisition, and the tax provisions as well as deductions available.
Conclusion
The capital gains taxation should be known when selling agricultural land in India. Nevertheless, urban agricultural land, as compared to rural agricultural land, which would typically not be taxed by the capital gains tax, may be a target of capital gains tax, either in the short run or over the long run. The agricultural land exemption of Section 54B gives a great tax benefit for agricultural land by allowing gains to be reinvested by eligible individuals and HUFs in another agricultural property.
Prior to selling farmland, the farmland owners should evaluate the classification of the property, the potential capital gain, and the exemptions. A tax expert can be sought to assist in compliance and prevent unwarranted tax burdens.