The taxation of capital gains on the sale of agricultural land is governed by the Income Tax Act, 1961. According to the Act, capital gains are taxable if there is a profit or gain resulting from the transfer of a capital asset during a financial year. Hence, three conditions must be met:

1. the asset must be a capital asset
2. it must be transferred
3. the transfer must have resulted in profits or gains.

Agricultural land can be broadly classified into two categories: rural agricultural land and urban agricultural land. The Income Tax Act specifically excludes rural agricultural land from the definition of a capital asset, and hence the transfer of such land is not taxable. However, urban agricultural land is considered a capital asset and is subject to tax on its transfer, subject to certain exemptions.

Rural Agricultural Land

Rural agricultural land is agricultural land located in India that does not fall

a. within the jurisdiction of a municipality, notified area committee, town area committee, or cantonment board which has a population not less than 10,000;

b. within range of the following distance measured aerially from the local limits of any municipality or cantonment board:

1. not being more than 2 KMs, if the population of such area is more than 10,000 but not exceeding 1 lakh;
2. not being more than 6 KMs, if the population of such area is more than 1 lakh but not exceeding 10 lakhs; or
3. not being more than 8 KMs, if the population of such area is more than 10 lakhs.

Urban Agricultural Land

Urban agricultural land, on the other hand, is any agricultural land that does not meet the criteria for rural agricultural land. The profits and gains resulting from the transfer of urban agricultural land are normally taxable, with the rate depending on the period of holding the land.

If the period of holding is more than 2 years, long-term capital gain tax is attracted and the capital gain arising on transfer is chargeable to tax @ 20%.

If the period of holding is less than 2 years, the transfer is subject to short-term capital gain tax at slab rates or normal rates.

Transfer of Agricultural Land by Compulsory Acquisition

The transfer of urban agricultural land on account of compulsory acquisition is exempted under section 10(37) of the Act subject to the following conditions.

1. the land was used for agricultural purposes for 2 years immediately preceding the date of transfer.
2. the compulsory acquisition is approved by the Central Government or Reserve Bank of India.
3. the compensation for such transfer was received by the assessee on or after April 1, 2004.

54B Exemption

Apart from the exemption under section 10(37), another exemption specifically available on transfer of urban agricultural land is under section 54 B.

This exemption is available when the capital gains are utilised for the purchase of another agricultural land subject to the following conditions.

1. the transferor should be an individual or HUF
2. the transferred land was used for agricultural purposes by the transferor or his/her parents or HUF for 2 years immediately preceding the date of transfer.
3. another agricultural land should be purchased within 2 years from the date of transfer
4. the newly purchased agricultural land should not be sold within a period of 3 years from the date of its purchase.
5. the assessee shall deposit the capital gains in capital gain account scheme if the purchase of new agricultural land is not effected before the due date of filing income tax return.
6. if the amount is deposited in capital gain account scheme, it should be withdrawn and utilised within 2 years from the date of transfer.

Conclusion

We have tried our best to present the capital gain on transfer of agricultural land in a simplified manner. Please note that the taxability on sale of agricultural land held as stock in trade is not covered in this piece of writing as it is dealt separately under business income.