When to consider Agriculture Land as Capital Asset?

This document covers

1. Agriculture Definition
2. Capital Asset Definition
3. Types of Agriculture Lands?
4. Taxability of Agriculture Land located outside India
5. Compulsory acquisition of agriculture land
6. Taxability of Compensation received under RFCTLARR Act, 2013
7. TDS on Sale or Purchase of Agriculture land
8. Purchase of Agriculture land by NRI

1. Agriculture Definition

Agriculture is the primary occupation of most of the people in India. The term ‘Agriculture’ was not defined by Income Tax Act. Generally, cultivation of field involving human skill and labour on the land can be broadly termed as agriculture.

Income from agriculture might come from the rent or sale of land, cultivation, or farming etc

2. Capital Asset Definition

As per the Income Tax Act, property of any kind held by any person whether or not connected with his business or profession is a capital asset.

3. Types of Agriculture Lands? When to consider as Capital Asset?

Agriculture lands are of 2 types i.e., Rural Agriculture land and Urban Agriculture land. The taxation differs depends on the type of land

1. Rural Agriculture Land: Rural agricultural lands in India are excluded from Capital Asset.
2. Urban Agriculture Land: Urban Agriculture lands in India comes under the definition of Capital Asset

3.1. Rural Agriculture Land:

1. Rural Agricultural Land in India means an agriculture land in India which is not situated in any specified area
2. There is NO capital gain tax on Sale of Rural agriculture land

Note:We need to check with Municipal office nearest to location of land whether the land falls under Rural Area or urban area.

3.2. Urban Agriculture Land:

1. Urban Agriculture land means the agriculture land
• Situated in any area within the jurisdiction of municipality or cantonment board having population of not less than 10,000 OR
• Situated in any area within such distance, measured aerially, in relation to the range of population as shown below



Distance (Shortest Aerial distance from the local limits of a municipality or cantonment board)	Population (Population according to latest census)
≤ 2Kms	> 10000
> 2Kms but ≤ 6 Kms	> 1,00,000
> 6 Kms but ≤ 8 Kms	> 10,00,000



2. Taxability: Sale of Urban Agriculture land is taxable under the head "capital gains"


3. Rate of Tax:

   If the Urban agriculture land is sold after 2 years of purchase, it is classified as long term and taxable @ 20% for the urban agriculture land sold before 23rd July 2024.

   NOTE :

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   • W.e.f 23rd July 2024, the long term capital gains is taxable @ 12.5% for the urban agriculture land sold after 23rd July 2024
   • If the urban agriculture land is acquired before 23rd July 2024, the taxpayer has an option to choose 12.5% rate without Indexation or 20% with Indexation. However the Maximum tax relief from 20% with indexation is up to an extent of the CG Tax @ 12.5%

   If the Urban agriculture land is sold before 2 years of purchase, it is classified as Short term and taxable @ ​slab rates

   
   
4. Reinvestment for Tax saving:
   
   
   • If the Individual or HUF has sold Urban Agriculture land which was used for agriculture in the previous 2 years preceding the date of transfer , The taxpayer can invest either in rural or urban agriculture land within 2 years from the date of sale
   • If the individual or HUF has sold urban agriculture land which was used for agriculture in the previous 2 years preceding the date of transfer, the taxpayer can invest in residential house property u/s 54F and Bonds u/s 54EC. Section 54EC and Section 54F deals with reinvestment in case of transfer of long-term capital asset being land or building or both. However, the taxpayer needs to follow the conditions under respective section.

4. Taxability of Agriculture Land located outside India

The Agriculture Land which is located outside India is always a Capital Asset and sale of Foreign Agriculture Land is taxable under the head “Capital Gains”

5. Compulsory acquisition of agriculture land

Compulsory acquisition means the Government’s power to acquire the rights in land for development.

1. Compulsory acquisition of Rural Agriculture land: As the Rural Agriculture land does not comes under the definition of capital asset, the proceeds from compulsory acquisition of rural agriculture land is not taxable.
2. Compulsory acquisition of Urban Agriculture land: Compensation or enhanced compensation received from compulsory acquisition of urban agriculture land is exempted from tax only if such land is used for agriculture purposes during the previous 2 years preceding the date of transfer. It is covered u/s 10(37)

6. Taxability of Compensation received under RFCTLARR Act, 2013

RFCTLARR stands for 'Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement' Act

• RFCTLARR Act came into effect from 01/01/2014.
• Compensation received under RFCTLARR Act either from Agriculture land or non-Agriculture land is exempted from the Income Tax
• CBDT has clarified that compensation received under RFCTLARR Act shall also be not taxable under the provisions of income tax act even if there is no specific provision for exemption of such compensation in the Income Tax Act 1961

7. TDS on Sale or Purchase of Agriculture land

No TDS is required to be deducted on purchase of Rural Agriculture land of value more than Rs 50 lakhs

TDS is required to be deducted @ 1% on purchase of urban Agriculture land if the value is more than Rs 50 lakhs u/s 194IA

8. Purchase of Agriculture land by NRI

NRI’s cannot purchase agriculture land , farm houses or plantation properties. If NRI wants to purchase agricultural land in India, they needs to obtain permission from RBI.