How to Save Tax on Sale of Agricultural Land?

1. Agriculture is the main occupation in India. Around two-third of India’s population is dependent on agriculture either directly or indirectly. Therefore, to relieve a common man who is involved in earning income from Agricultural purposes, income tax on agricultural income is exempt. But what about tax on sale of agricultural Land, let us understand this concept in this article.
 

What is an Agricultural land?
Any land used for the purpose of carrying out agricultural activities shall be treated as Agricultural Land. It can be situated in the Rural area or Urban area. Primarily land is a capital asset as defined u/s 2(14) of the Income Tax Act, 1961 but if the land is an agricultural land the scenario is different. Agricultural Land situated in Rural area is not considered a capital asset and therefore any gains from its sale are not taxable under the head Capital Gains. So, if agricultural land is situated in the Urban area, then it is a capital asset and gains from its sale are taxable under the head capital gains.
 

Definition of Rural Area: As per Income Tax Act, any area which is outside the jurisdiction of a municipality or cantonment board having population of 10000 or more is considered Rural area, if it does not fall within the distance below (measured aerially):
(a) 2kms from local limit of municipality or cantonment board and if the population of the municipality or cantonment board is more than 10000 but less than or equal to 1 lakh.
(b) 6kms from local limit of municipality or cantonment board and if the population of the municipality or cantonment board is more than 1 lakh but less than or equal to 10 lakh.
(c) 8kms from local limit of municipality or cantonment board and if the population of the municipality or cantonment board is more than 10 lakh.

 Capital Gains Tax on Sale of Urban Agricultural land
(a) If an agricultural land is held for 24 months or less, then the asset shall be treated as Short Term Capital Asset and Short term capital gains on agricultural land shall be taxable as per income tax slab rate.
(b) If an agricultural land is held for more than 24 months, then an asset shall be treated as Long term capital asset and Long term capital gains on agricultural land shall be taxable at 20%.
Therefore, to lower the tax liability on sale of agricultural land one can purchase rural agricultural land or can avail below mentioned deductions :


(a) Deduction u/s 54B
1. If capital gains made on sale of agricultural land is re-invested in acquiring another agricultural land (rural or urban) within 2 years of transfer of old agricultural land, then capital gains made on old agricultural land shall be exempted or amount invested in acquiring new land whichever is lower.
2. This deduction is available to an individual or HUF.
3. In order to claim exemption u/s 54B, an urban agricultural land must have been used by an individual or the parents of an individual for agricultural purposes for the period of atleast 2 years prior to the date of transfer. In case of transfer of land by a HUF, the land should have been used by any member of HUF.

(b) Deduction u/s 54F
1. As per the provisions of Section 54F of Income Tax Act, 1961, exemption of Capital Gain is available in case of transfer of any long term capital asset other than residential house.

1. The exemption is available Only to Individual and HUF (Hindu Undivided Family).

2. Capital gain which has arisen on transfer of any long term capital asset must be invested in Residential House.

3. Net Consideration arisen on account of transfer of long term capital assets has been invested as follows:

    a.It has been Re-invested in Purchase of One Residential house within a period of 1 year Before the Date of Transfer, Or

    b. It has been Re-invested in Purchase of One Residential house within a period of 2 years After the Date of Transfer, Or

It has been Re-invested in Construction of One Residential house in India within a period of 3 years From the Date of Transfer.
For the purpose of this section Net Consideration can be defined as full value of consideration received on account of transfer of the capital assets as reduced by expenditure incurred wholly and exclusively in connection with such transfer.
Net Consideration= Full Value (-) Expenditure
Exemption under section 54F= Long Term Capital Gain* Amount Re-invested/ Net Consideration

(c) Deduction u/s 54EC
1. If a Long term capital asset being an urban agricultural land is transferred due to which capital gains are earned, then on re-investment of that amount in Long term Specified asset within 6 months from the date of transfer, the capital gains on agricultural land is exempted.
2. Long term specified asset means:
(a) Bonds redeemable after 5 years issued by the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981; or(NABARD)
(b) Bonds redeemable after 5 years issued by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988; (NHAI)
(c) Bonds redeemable after 5 years issued by Rural Electrification Corporation; (REC)or
(d) Bonds redeemable after 5 years issued by Power Finance Corporation Limited (Government has notified that said bonds issued on or after 15th June 2017) (notification no. 47/2017 dated 8th June 2017) ; (PFCL)or
(e) Bonds redeemable after 5 years issued by Indian Railway Finance Corporation (Government has notified that said bonds issued on or after 8th August 2017) (notification no. 79/2017 dated 8th August 2017 (IRFC).
 

3. The maximum deduction available under this section is Rs. 50 Lakhs are irrespective of the re-invested amount.

Therefore, to lower the tax liability on sale of urban agricultural land one can purchase rural agricultural land or can avail above mentioned deductions.