Farmhouses near large cities such as Delhi could soon lose their tax-free status. People who live in houses built on agricultural land that might or might not be used for farming have thus far avoided paying tax on rentals or on gains from sales of such land.
In India, agricultural income is exempt from tax.
Current tax laws state that any farmhouse that is beyond 8 km outside the city limits is eligible for this exemption. The finance ministry is likely to extend this limit to 16km in this year’s Union Budget that will be presented on February 28.
Although the farmhouse phenomenon is present in Chennai (on the road to heritage town, Mahabalipuram) and Bangalore, it thrives in Delhi, especially on the periphery of the city.
Tax experts said the new law would have three broad implications for owners of agricultural land within 16km of the city. Gains on the sale of such land would attract capital gains tax, the rental income would attract income tax and the ownership of the land itself would attract wealth tax, which is applicable on urban land.
“To my mind, capital gains is the major consideration,” said Ravi Prakash, a principal at audit firm Pricewaterhouse Coopers.
With property prices rising, some farmhouse owners have sold agricultural land and avoided paying tax on the gains (called capital gains in economic parlance).
Officials at the ministry of finance said the decision was based on a discussion at a tax commisioners’ meet that took place in 2006.