An agricultural land may either be situated in a rural area or urban area. Tax implication will differ in both the cases.
As per the definition u/s 2(14), an agricultural Land in a rural area is NOT a Capital Asset.
Yes, you read that right!
Income tax won’t be levied on the sale of a rural agricultural land.
In this article, we will cover the capital gain tax on a sale of urban agricultural land and an exemption under section 54B.
Capital Gain Tax on Sale of Urban Agricultural Land
A. Capital Gain Tax Exempted
In the following 2 cases, the Capital gain tax is exempted-
- If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business & Profession (PGBP).
- Capital Gains on compensation received on compulsory acquisition of urban agricultural land is exempt from tax. [ Under Section 10(37) ]
B. Capital Gain Tax Applicable
Apart from the above 2 exempted cases, an agricultural land situated in an urban area would be considered as a capital asset and capital gain tax would be levied on its sale.
Capital gain tax in such a case would be computed in the same manner as is computed on the sale of other property.
The cost of acquisition and cost of improvement would be deducted from the sale price to arrive at the capital gains.
|Calculation of Capital Gain|
|Cost of acquisition or indexed cost of acquisition (in case of a long-term capital asset)||xx|
|Cost of improvement or indexed cost of improvement (in case of a long-term capital asset)||xx|
|Long-term or short-term capital gain||xxx|
|**Expenditure incurred wholly and exclusively in connection with the transfer of capital asset can also be deducted from the sales consideration. Example: brokerage, commission, advertisement, expenses, etc.|
- Short-Term Capital Gain arises when a land is sold within 24 months of its purchase. [From AY 2018-19]
- Long-term capital gain arises when a land is sold after 24 months of its purchase.[From AY 2018-19]
- TDS under section 194IA is not applicable on 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).
Exemption from Capital Gain Tax on Sale of Urban Agricultural Land [ under Section 54B ]
An Individual or HUF can avoid capital gain tax on a sale of agricultural land if all the given conditions are met –
- 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 2 years immediately before the date of transfer.
- Either you can purchase another land for the agricultural purpose within a period of 2 years from the date of transfer of the above land or deposit the capital gain amount before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
- The new agricultural land should not be sold for the next 3 years from the date of its purchase. [Its Consequence is explained in Example 1 below]
- If the capital gain amount is deposited in accordance with the Capital Gains Account Scheme, such amount should be used to purchase of agricultural land within 2 years from the date of sale of original land. [Its Consequence is explained in Example 2 below]
If the deposited amount is not used for the purchase of agricultural land within 2 years from the date of sale of original land, then such capital gain will be taxable in the year immediately after the expiry of 2 years from the date of sale of original land.
Maximum Exemption Under Section 54B
Maximum exemption u/s 54B shall be lower of:
- Amount of capital gains arising on transfer of agricultural land; or
- Investment in the new agricultural land including the amount deposited in Capital Gains Deposit Account Scheme.
Therefore, If the cost of the new agricultural land purchased is more than the amount of capital gains, entire capital gains amount will be exempted.
Similarly, if the cost of the new agricultural land purchased is less than the amount of capital gains, then:
The capital gains chargeable to tax = Capital Gains less cost of the new agricultural land
Example 1: When New Land is Sold Within 3 yrs of its Acquisition
- Sold Original Agricultural land in April 2018 for Rs. 25,20,000.
- Long-term capital gain arising on transfer of the land amounted to Rs. 8,40,000. (After calculation)
- In December 2018 he purchased another agricultural land worth Rs. 5,00,000.
- The new land was sold in April, 2019 for Rs. 12,00,000.
Calculate the amount of taxable capital gains for the financial years 2018-19 and 2019-20.
|Calculation of Capital Gain (FY 2018-19)|
|Long-term Capital Gain (LTCG)||840000|
|Exemption u/s 54B**
1. Rs. 8.4 Lakh (LTCG)
2. Rs. 5 Lakh (Investment in New Land)
|Taxable Long-term capital Gain||340000|
|**Assuming conditions as satisfied under section 54B are fulfilled|
Exemption u/s 54B which was previously allowed will be deducted from the cost of acquisition (purchase) of new land if the new land is sold within 3 years from the date of its purchase.
Due to this, the capital gain on sale of the new asset will increase by the amount of previous exemption u/s 54B.
Therefore, the cost of new land after its sale will be Rs. Zero(0). [Rs.5 lakh(investment in new land) Less Rs.5 Lakh (exemption u/s 54B)]
|Calculation of Capital Gain (FY 2019-20)|
|Cost of acquisition (purchase)||0|
|Taxable Short-term capital Gain**||1200000|
|** Short-term capital gain arises when a land is sold within 24 months of its purchase|
Example 2: When New Land is Not Purchased Within 2 yrs (Non-utilization of capital gain deposit)
- Sold an agricultural land on 25th August 2017 for Rs.18,40,000.
- Long-term Capital gain arising on sale of land amounted to Rs. 3,00,000.
- He could not purchase another agricultural land by 31st July 2018.
- However, he deposited Rs. 5,00,000 in Capital Gains Account Scheme in July 2018.
- He did not purchase any agricultural land till 24th August 2019. (2 years from 25th Aug 2017)
Will he be entitled to claim any exemption under section 54B? If yes, will the exemption granted be revoked?
For AY 2018-19, exemption u/s 54B will be Rs.3,00,000/- only [Lower of Rs. 3Lakh(Capital gain) or Rs. 5 lakh (deposit)]
He should have utilized the funds deposited in the scheme to purchase another agricultural land within the specified period of 2 years.
In this case, the period of 2 years gets over on 24th August 2019.
Mr. Anand has not purchased any agricultural land till 24th August 2019. Therefore the exemption of Rs.
3,00,000 allowed in the year AY 2018-19 will be revoked and will be taxed as income by way of long-term capital gains for the year AY 2020-21.