In India, there is a popular belief that agricultural land is a lucrative investment option since no capital gains tax means the returns are higher. However, the fact is that exemption on capital gains tax is only for rural agricultural land and not everyone can even buy agricultural land in India. So, what exactly is rural agricultural land and who are allowed to purchase it? Read on and find out!
Going by the reports in 2022, approximately 60 percent of Indian land is under cultivation. In this flourishing agrarian economy, the classification and legal rules regarding every cultivable land is not the same. Per se, agricultural land in India is broadly divided into two categories, i.e., urban and rural agricultural land
Urban and rural agricultural land in India: Distinction
Rural agricultural land
Rural agricultural land refers to the land used for farming activities in rural areas. India is predominantly an agrarian economy, with a significant portion of the population engaged in agriculture. The rural agricultural land is primarily used for cultivating crops such as wheat, rice, pulses, and vegetables.
Urban agricultural land
Urban agricultural land, on the other hand, refers to the land used for farming activities in urban areas. It refers to any agricultural land situated in an area within the jurisdiction of cantonment board or municipality with a population equal to or more than 10,000. With rapid urbanization and the growing demand for fresh produce in cities, urban agriculture has gained prominence in recent years.
Urban agricultural land is typically smaller in size compared to rural agricultural land. It includes rooftop gardens, community gardens, and small-scale farms within the city limits. These spaces primarily contribute to the availability of locally grown, organic produce in urban areas.
Criteria for classifying rural agricultural land
In India, land is classified as rural agricultural based on certain criteria. These criteria help determine the purpose and usage of the land. Here are the key factors considered:
Land area and population: The land should be within the municipality jurisdiction to be classified as rural agricultural, along with a population below 10,000. This ensures that the land is suitable for agricultural activities.
Location: The land should be located in rural areas, away from urban or industrial zones. This ensures that the land is primarily used for agricultural purposes and not for commercial or residential development. When located outside municipality limits, it has to be at a distance of:
- Over two km from the municipality limits with a population of over 10,000 but below 1,00,000
- Over six km from the municipality limits with a population of over 1,00,000 but below 10,00,000
- Over eight km from the municipality limits with a population of over 10,00,000
Legal documentation: Proper legal documentation, including land ownership records, should be in place to classify the land as rural agricultural. This ensures transparency and authenticity in land transactions.
Taxability of rural agricultural land
- Agricultural land in rural areas in India is not considered a capital asset under section 45 of the Income-tax Act,1961. Therefore any gains from its sale are not taxable under the head ‘Capital Gains’.
- It is essential to note that to claim the non-taxability of Rural Agricultural land, agricultural operation must be carried out to claim the exemption.
- If such land is stock in trade or if you are in the business of buying and selling rural agricultural land, then it is considered business income and will be chargeable to tax.
Taxability of urban agricultural land
Urban agricultural land ( land which is not rural land) is considered a capital asset. The taxability of Urban Agriculture land is as follows
- Long-term capital gain– Holding Period greater than 2 years and tax @ 20% will be levied after considering the indexation benefit.
- Short-Term capital gain– Holding Period less than 2 years and tax @ Slab rates will be levied.
Amount of Exemption
- If the cost of the new agricultural land purchased is more than the number of capital gains, entire capital gains are exempt.
- If the cost of the new agricultural land purchased is less than the number of capital gains, Capital Gains less cost of the new agricultural land = capital gains chargeable to tax
Disclosure of Agricultural Land Sale in ITR
· Sale of Rural Agricultural Land
Since Rural agricultural Land is not a capital asset as per the definition of the Income-tax Act, any gains arising from the same are not taxable. Income from agricultural land is exempt u/s 10(1) and needs to be disclosed in Schedule EI of ITR. However, profit on the sale of agricultural land, which is non taxable in nature, need not be disclosed in the income tax return.
· Sale of Urban Agricultural Land
Urban Agricultural Land is a capital asset, and the sale of such assets needs to be disclosed in Schedule CG in ITR. You can reduce the Indexed cost of acquisition and improvement from such sale value. You can also claim exemption u/s 54B, 54EC and 54F on the sale of Urban Agricultural Land
Conclusion
To summarise, if agricultural land is located in an urban area, it would be considered a capital asset and subject to capital gains tax upon its sale. Understanding the tax implications of selling agricultural land in an urban area is crucial to ensure compliance with tax laws and regulations and to maximise profits.