Although India is primarily an agrarian economy, those who depend on farming for their livelihood are granted a variety of incentives and benefits. For example, farmers in India are exempt from paying any taxes on the income they make from agricultural land under the country’s concessional tax regime.
Agricultural land is still subject to taxes, this law just exempts them from taxes on their agriculture income.
It is important for land owners to understand the taxes that affect them and the laws that govern such taxation. Depending on how a piece of land is sold, its quality and area, the related tax may differ. For example, if someone sells property that was purchased using loans or with a mortgage in place- they may not be subject to taxation even if they are being charged interest
In this blog, we cover everything you need to know about agricultural land taxation- make sure to check it out!
Classification of Agriculture Land In India
According to India’s Income Tax Act, two categories of agricultural land exist: rural and urban.
Both types of lands are different and so any sales profit is taxed differently. Let’s look at these individually!
Rural Agriculture Land
In India, it is the land that is:
(a) Places with a population of less than 10,000 and located in the city’s jurisdiction.
(b) Located outside the municipality’s limits but:
- Within a distance of more than 2 kilometres from the municipality’s local limits and has a population of more than 10,000 but not exceeding 100,000..
- Located outside the municipality’s borders but within a 2 kilometer distance from the municipality’s limits.
- More than 8 km from the municipality’s limits and population of over 10,000
The number of people living within 2 kilometres is 10,000. The population between 2 and 6 kilometres is 1,00,000. More than 10 lakhs live at a distance of 8 kilometres from the municipality.
Urban Agricultural Land
“Urban farming land” is a term that refers to specific land that’s used for agriculture. It’s different from rural land and can offer a lot to the community.
a.) If the municipal area falls below 10,000 inhabitants
b.) If located outside the municipality’s boundaries, then located at a distance measured in kilometres as:
- The municipality has a population exceeding 10,000 people but no more than 100,000.
- All municipal areas within the Bay Area with a population of up to 1,00,000 but not more than 10,00,000
- The population of this municipality is 10,000 or more and it’s 8 km or further from the bordering region.
Taxability of sale of Agricultural Land in India
The money you make from the sale of land can be treated as two different types of income. If the land is a business asset, then any profit made will be considered as a business income. However, if it’s an asset that you invested in, then the profit is treated as capital gain.
- Taxation on Sales of Rural Agricultural Land
As agricultural land is not a capital asset, it is exempt from any capital gains tax. This means you will never have to pay a single penny when you sell or transfer the land.
- Taxation on Urban Agricultural Land
The tax on the sale of agricultural land in urban areas would be calculated similarly to that of other assets.
To compute capital gains on a property, the acquisition cost of the land plus any improvements will be deducted from sale consideration.
The type of capital gain, such as long-term or short-term, is determined by the length of time the asset has been held. If you hold it for more than two years, then the capital gain is considered to be a long-term capital gain
If you sell land often or you run a business, like an agricultural enterprise, then any income generated from the sale of this type of property will be taxed under the heading Business & Profession. This also implies that no capital gains on such agricultural land will be charged.
Capital Gain Tax Exemptions
Under Section 54B, you can claim capital gain exemption on the sale of urban agricultural land for investment in other agricultural lands. However, there are certain conditions that the purchaser must meet.
- A single individual or corporation can use the exemption under Section 54B of the IT Act
- The agricultural land transferred must have been a capital asset.
- To qualify for the agricultural land deduction, various conditions must be met. The same applies to HUFs – the land must have been used by its members and also meet certain standards.
- If your cost of new land is greater than the capital gains, you will be exempt from capital gains tax. If not, any capital gain above the cost of your new land will be attributed to you and form part of your taxable income.
If you’re in the agriculture business, these are some of the India-specific laws you need to be aware of. If there is anything unclear or specific about your taxation for agricultural lands, you can get help from our experts.