Is sale of agricultural land taxable? Capital gains exemption explained

Taxation rules for agricultural land

The tax liability arising out the sale of agricultural land depends on its classification, as either rural or urban. Today's Ask Wallet Wise query explains how profits from rural land are fully exempt, gains from urban agricultural land may attract capital gains tax  with exemptions available under Sections 54B and 54F of the Income Tax Act.

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I recently sold agricultural land that was purchased in 2007. Is the sale exempt from capital gains? If yes, what supporting documents will I need? If is results in taxable capital gains, can I avail exemption under Section 54F of the Income Tax Act?

I am in the real estate business and own eight flats, some of which are rented out. Will holding these flats affect my eligibility to claim exemption under Section 54F?

Expert’s view: The taxability of capital gains on the sale of agricultural land depends on whether the land qualifies as rural agricultural land or urban agricultural land.

Agricultural land situated beyond the prescribed distance from the limits of a municipality or cantonment board is treated as rural farm land. Such land is not considered a capital asset, and therefore, any profit from its sale or transfer is not taxable regardless of the holding period.

Agricultural land within the prescribed limits of a municipality or cantonment board (the distance varying based on population) is treated as a capital asset. Profits from its sale or transfer are taxable as capital gains, long-term if held for more than two years, or short-term if sold within two years.

Section 54F of the Income Tax Act allows exemption from long-term capital gains arising from the sale of any capital asset other than a residential house, provided the net sale proceeds are invested in purchasing or constructing a residential house within the prescribed time period.

This exemption cannot be claimed if the taxpayer owns more than one residential house (other than the new house being acquired) on the date of sale of the original capital asset. Since you owned multiple residential house properties at the time of selling the urban agricultural land, you will not be eligible to claim exemption under Section 54F in respect of the long-term capital gains arising from its sale.

You may, however, be eligible for exemption under Section 54B, which provides relief on long-term capital gains arising from the sale of agricultural land if the proceeds are reinvested in the purchase of another agricultural land within the prescribed time frame and subject to the conditions specified in that section.

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