Taxpayers often assume that agricultural land sales are completely exempt from income tax, but this isn't always the case. According to reports from Mint, whether tax is payable depends on factors such as the location of the land and whether it qualifies as a capital asset under income tax law. Rural agricultural land is exempt from capital gains tax under Section 2(14)(iii) of the Income Tax Act, 1961, as it is not treated as a capital asset. However, urban agricultural land is considered a capital asset and attracts taxation based on holding period and location.
As reported by Mint, urban agricultural land is treated as a capital asset with specific tax implications based on holding period. Short-term capital gains (STCG) are taxed as per the individual's income tax slab if the land was held for up to 2 years. Long-term capital gains (LTCG) are taxed at 20% with indexation benefit if held for more than 2 years, or alternatively at 12.5% without indexation benefit for resident individuals.
According to a Cleartax report cited by Mint, agricultural land is classified as rural or urban based on location and distance from municipalities. Rural agricultural land is defined as land within a municipality's jurisdiction with population less than 10,000, or outside municipal limits at distances of more than 2 km, 6 km, or 8 km from municipalities with populations of 10,000, 100,000, or 10 lakh respectively. Land not meeting these criteria is treated as urban agricultural land and subject to capital gains taxation.
As reported by Mint, both taxable and tax-free agricultural land sales must be reported while filing income tax return (ITR) but under different sections. Rural agricultural land income must be disclosed in Schedule EI (Exempt Income) since it is not a capital asset. Urban agricultural land sales need to be reported in Schedule CG (capital gains) as it is treated as a capital asset under the income tax law.
According to Mint, taxpayers selling urban agricultural land can save taxes through reinvestment under Section 54B of the Income-tax Act. The land must have been used for agricultural purposes by the owner or their parents in the two years immediately before the sale, and the capital gain must be reinvested in purchasing another agricultural land within two years. Alternatively, taxpayers can deposit capital gains in a Capital Gains Account Scheme (CGAS) before the ITR filing deadline if immediate reinvestment is not feasible.
