Capital Gains Sale of Agricultural Land: Section 54B Exemption 2019-20

Agriculture land which is reducing day by day for basic agriculture purposes, the main cause is population everybody wants land for agriculture or some other purpose, like (residential, commercial etc). This article is all about capital gain on sale of agricultural land.

In India agriculture land only be available in a rural area or urban areas and tax implications are totally different.

Capital gain tax on sale of rural Agriculture land

According to section 2(14), rural agriculture land is not considered as a capital asset, that’s why Income tax won’t be levied on the sale of rural agricultural land.

That’s it!

Yes, the facts reveal that any sale of agricultural land capital gains u/s 2(14) is free from tax liability.

There is some parameter to differentiate the nature of rural and non-rural agriculture land.

All agriculture land in India is not out of the radar under category capital assets. 

• land situated in any area which is comprised within the jurisdiction of a municipality (whether known as 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 ten thousand [according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
• In any area within the distance, measured aerially-

Brief information

Capital gain tax on sale of non-rural/Urban Agriculture land

Apart from above any agricultural land in an urban area is completely taxable, Capital gain tax in such cases would be computed in the same manner as is computed on the sale of other property.

Formula to calculate (long term & short term) capital gain from the sale of agriculture land:

For the computation of capital gain on agricultural land, it is required to trim the acquisition cost along with the cost of improvement from sales price.

Also Read: Capital Gains Tax On Shares

How to save tax on Capital Gains on Sale of Agricultural Land

Purchase and sale of agriculture land involve a huge amount of money the transaction amount doesn’t have any space to get rid of Income-tax there are some criteria available for assessee ~

Exemption of Capital Gain Tax (under Section 54B)

Selling Rural agriculture land attract income tax, section 54B releases some pressure of tax.

How?

Some of the Highlights required to understand.

• This Exemption is only available for individual and Hindu undivided families.
• The land is purely used for agriculture purposes by an individual or by his parents or by Hindu undivided family from the last 2 years from the date of transaction.
• You have to purchase another land for agriculture purposes within 2 years from the date of the transaction.
• The New agricultural land which 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 unable to purchase another agriculture land before the date of furnishing of your Income Tax Return, the sales amount must be deposited in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
• If you are unable to purchase the agriculture land from the amount deposit as per the Capital Gains Account Scheme – the whole amount is treated as a capital gain.

Exemption Limit u/s 54B

• If the cost of the new agricultural land purchased is more than the number of capital gains, entire capital gains are exempt.
• If the cost of the new agricultural land purchased is less than the number of capital gains, Capital Gains less cost of the new agricultural land = capital gains chargeable to tax.

Calculations Examples with different scenarios

# Sold agriculture land within 3 years of acquisition

Mr. Raj Sold his agriculture land for Rs 27.82 Lakhs in May 2017 which he was acquired on Nov 2014, After index calculation, long term capital gain tax comes out to be 9.17 Lakhs. Now he decided to acquire another agriculture land for Rs 7 Lakhs on Feb 2018, AND again that land was sold for 10 Lakhs on Nov 2018.

What would be the calculation of capital gain for the financial year (FY) 2017-18 & 2018-19?

As we have discussed above if the new agricultural land is sold within 3 years from the date of its purchase below the capital gain amount, the purchase amount is adjusted in the LTCG Tax amount and the rest of the amount is taxable.

Again u/s 54B “The New agricultural land which is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase”

That’s why the sales amount becomes the profit (short term capital gain) and tax under-considered tax slab.

# What If the New land is not purchased

Mr. Raj Sold his agriculture land for Rs 27.82 Lakhs in May 2017 which he was acquired on Nov 2014, After index calculation, long term capital gain tax comes out to be 9.17 Lakhs. 

He could not purchase another agricultural land, however, he deposits part of Rs 5 Lakhs in the capital gain scheme account on June 2018. He did not purchase agriculture land upto 2 years from May 2017.

So what would be the taxation and exemption scenario in that position?

“Under section 54B the amount required to purchase another land for agriculture purposes within 2 years from the date of the transaction. Therefore the exemption will be revoked and the amount will be taxed as income by way of long-term capital gains“.

Stamp Duty while selling agriculture land u/s 50C

As we have learned in the previous article Capital Gain Tax on Sale of House Property any transaction below circle rate (stamp duty rate) is treated as stamp duty rate value. Agriculture land is also an immovable property like a house property. So while selling agriculture land, section 50C will be applicable.

Also Read:- Section 50C

Section 10(37) of Income Tax Act

Government compulsory acquisition u/s 10(37)

We all have heard about Government schemes implemented for the acquisition of Land, the best example is (Railway Line), the farmers get compensation or enhanced compensation received.

The question is (IS AMOUNT RECEIVED AGAINST GOVERNMENT COMPULSORY ACQUISITION IS TAXABLE?) There is a huge amount involved, but the fact is the owner of the land is not in the mood to sell this property, so income tax department exempt that transaction from tax under income tax act 10(37) effected on or after 1/4/2004.

Few Conditions required to satisfied

• Only Individual and HUF assessee can avail the benefit u/s 10(37).
• The land is used for agriculture purposes from the last 2 years by the individual or his parents or by HUF.
• The Acquisition must to executed by the Central Government or by order of RBI or compulsory acquisition by any law.
• The compensation amount received after 01 April 2014 is totally exempted.
• If the partial amount received before 01 April 2014 and balance after the whole amount again exempted.
• Finally, the compensation amount received before 01 April 2014 & some enhancement amount received after 01 April 2014 – the Only enhanced amount is taxable.

If the land has been held for more than two years from its date of purchase, it will be considered a long-term capital asset.

Treatment of Tax on selling an agricultural plot Gifted

If the recipient receives immovable property under certain specified condition from relative like (marriage gift, under a will or by way of inheritance, or in contemplation of death of payer, etc.) The property is exempted by Law.

Relative: Spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents.

Generally, agricultural land is not considered as a capital asset and, therefore, its sale does not attract capital gains tax. Under certain conditions, the land will be treated as a capital asset and the liability of capital gain tax will be levied.

For capital gain calculation the purchase price of the first owner will be considered as its cost price. Further.

If the agriculture land has been held for more than two years from its date of purchase, it will be considered a long-term capital asset along with indexation cost is considered while calculation of capital gain tax.

Also Read: How to Fill Short Term Capital Gain in ITR-2

Sale of agricultural land, where to show in ITR

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gain tax on agriculture land sale are required to file ITR-2, The requirements regarding capital gains in ITR-2 are extensive and depend upon the type of asset sold and period of holding.

Even if your Capital Gain is exempted (in urban area sale of agriculture land) & (government compulsory acquisition) you have to disclose mentioning the details under Schedule EI.

TDS under section 194IA is not applicable to sale of agricultural land, however, TCS (tax collection at source) may get attracted if the sale proceeds in cash exceed Rs.2 lakhs under section 206C(1D).

Income tax on sale of ancestral agricultural land

Inherited agricultural land is treated as the property received from grandparents. There is no tax liability on getting such agricultural land property until you decide to sell it.

Question: If I sell my ancestral agricultural land, do I need to pay the capital gains tax?

The property did not cost anything to the inheritor, but for calculation of capital gain, the cost to the previous owner is considered as the cost of acquisition (Purchase Cost) of the property. The rest of the value needs not required to find out.

Inherited farmland capital gains tax is also calculated in the same way.

Capital gains Tax Rate 2019