According to tax experts from KPMG in India, agricultural land is generally not considered a capital asset unless it falls within specific urban limits. Agricultural land qualifies as a capital asset only when situated in areas with populations of 10,000 or more, or in areas with populations as specified in the table below:
The Income-tax Act provides specific distance requirements for agricultural land classification. For areas with populations between 10,000 and 100,000, the land must be within two kilometres of the municipal boundary. For areas with populations between 100,000 and 1 million, the distance increases to six kilometres. For areas with populations exceeding 1 million, the land must be within eight kilometres of the municipal boundary.
As reported by KPMG in India, assuming the inherited agricultural land qualifies as a capital asset, the total holding period of 40-50 years (including previous owners) would qualify it as a long-term capital asset. This means gains on the sale would be considered long-term capital gains (LTCG), which are taxed at lower rates compared to short-term capital gains.
According to the tax experts, Section 54F of the old Act (Section 86 of the new Act) allows deduction towards LTCG arising on sale of any long-term capital asset, except residential house. This section may be applicable if the net consideration from agricultural land sale is invested in a residential house in India within specified timelines and all other conditions are satisfied. As noted by KPMG in India, the deduction under Section 54 of the old Act (Section 82 of the new Act) is available towards LTCG arising on the sale of a residential house, but the sale of agricultural land shall not be eligible for deduction under this section.
As noted by KPMG in India, Section 54B of the old Act (Section 83 of the new Act) provides deduction towards LTCG arising on sale of any land used by the assessee or his parent for agricultural purposes. This section may be examined if another land was purchased for agricultural purposes, subject to satisfaction of specified timelines and conditions. The deduction under Section 54 of the old Act is not available for agricultural land sales.
