The sale of agricultural land located in villages remains exempt from capital gains tax under the Income Tax Act, 1961. According to reports from Mint, rural agricultural land is not treated as a capital asset under Section 2(14)(iii) of the Income Tax Act, making it tax-free regardless of the sale proceeds received. This exemption applies to land situated beyond the jurisdiction of municipalities or cantonment boards having a population of 10,000 or more, provided the land remains outside specified distance limits from local municipal boundaries.
When agricultural land is located in cities or urban areas, it becomes subject to capital gains tax treatment. As reported by Mint, urban agricultural land is considered a capital asset under the Income Tax Act, with taxation depending on the holding period. Short-term capital gains (STCG) apply when land is held for up to 2 years, taxed at the owner's income tax slab rate. Long-term capital gains (LTCG) apply for holdings exceeding 2 years, taxed at 20% with indexation benefit, or alternatively at 12.5% without indexation benefit for resident individuals.
The classification between rural and urban agricultural land is based on specific distance criteria from municipal boundaries. According to the income tax department's guidelines reported by Mint, land beyond 2 km from municipalities with population up to 1,00,000 remains exempt, while land beyond 6 km from municipalities with population between 1,00,000 and 10,00,000 is also exempt. For municipalities with 10,00,000 or more population, the exemption applies up to 8 km from local limits. Any land failing to meet these distance criteria is treated as urban agricultural land and subject to capital gains taxation.
Inherited agricultural land follows different taxation rules compared to purchased land. As reported by Mint, inherited property is not taxed at the time of inheritance, but when legal heirs sell urban agricultural land, they become liable for capital gains taxation. The cost basis for computing capital gains is taken as the cost incurred by previous owners who acquired the property for consideration, with the holding period including all previous ownership periods beginning with the original acquisition for consideration.
The reporting of agricultural land sales varies based on the land's classification. According to Mint, rural agricultural land income must be disclosed in Schedule EI (Exempt Income) of the income tax return, while urban agricultural land sales require reporting in Schedule CG (Capital Gains). For non-audit cases without business income, taxpayers can file ITR-2 to report rural agricultural land sales, while those with business or professional income should use ITR-3 (if not choosing presumptive taxation).
