Updated: 28-01-2025 at 6:40 AM
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Agriculture is an essential activity in the Indian Economy and it accounts for nearly 14% of the Gross Domestic Product or GDP. The government releases multiple agricultural schemes from time to time to help farmers and assist in agriculture. Various exemptions and schemes have also been made with regards to agricultural land.
In some regions, subsidies are provided on the purchase of agricultural land. Various tax benefits are also offered to people owning or selling agricultural land. One such benefit is the treatment of agricultural land under the head of ‘Capital Gains’. Let us learn about it in depth!
For taxation purposes, especially under the head of Capital Gains, agricultural land is divided into two categories, rural agricultural land and urban agricultural land. It is most important to note that while capital gains from the transfer of urban agricultural land are fully taxable, capital gains from the transfer of rural agricultural land are not taxable under law.
Rural agricultural land, in simple words, is not considered a capital asset under the Income Tax Act, thus making it exempt from taxation.
Under the Income Tax Act of 1961, Rural Agricultural Land is defined as follows:
It means an agricultural land in India –
(a) If situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or
(b) If situated outside the limits of the municipality, then situated at a distance measured-
Shortest aerial distance from the local limits of a municipality or cantonment board | Population according to the last census |
---|---|
< 2 kms | > 10,000 |
> 2 kms but < 6 kms | > 1,00,000 |
> 6 kms but < 8 kms | > 10,00,000 |
Any land that does not fulfil the above mentioned criteria falls under the category of urban agricultural land and shall be taxable under the taxation system. |
Since urban agricultural land is taxable, it is taxed by looking at the holding period. This implies that the capital gain from the transfer of such land will be taxed depending upon the time period for which such land has been held.
Long-term capital gain - Holding Period greater than 2 years - tax @ 20% will be levied after considering the indexation benefit.
Short-Term capital gain - Holding Period less than 2 years - tax @ Slab rates will be levied.
After Union Budget 2024, taxpayers now have an option of either paying tax according to the above mentioned rates of Long Term Capital Gains or by paying tax @ 12.5% without indexation benefits.
Certain exemptions may also be available to an individual or HUF (Hindu Undivided Family) under sections 54B, 54C and 54F.
In cases where the value of a property exceeds Rs. 50 Lakhs, 1% TDS is to be deducted on purchase or sale of properties. However, agricultural land is exempted from this provision as per Section 194A even if the value of property is more than Rs. 50 Lakhs.
One must be aware of all the tax benefits available under the Income Tax Act as it helps in saving tax and paying the rightful amount. Further, as a responsible citizen, you must pay your taxes on time and with the rightful consideration.
For more information, contact a chartered accountant or visit your nearest Income Tax Office. Visit Jaagruk Bharat for information on latest income tax notifications.
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