Sold agricultural land in your hometown? Check if you must pay capital gains tax on the sale

If you recently sold agricultural land in your hometown, you may be wondering whether the money you received from the sale will be subject to capital gains tax. The answer depends on factors such as the parcel's location and whether it qualifies as a capital asset.

Even when no capital gains tax is payable, you are still required to report the transaction while filing your income tax return (ITR) for the relevant financial year when the sale happened. Both taxable and tax-free agricultural land sales are reported under different heads of the ITR form.

What if agricultural land is located in a village?

The sale of rural agricultural land is exempt from capital gains tax, meaning if the said agricultural land is located in a village or rural area, then you won't have to pay any tax on the sale proceeds.

Under Section 2(14)(iii) of the Income Tax Act, 1961, rural agricultural land is not treated as a capital asset, making it tax-free.

When do you have to pay tax on such land sales?

Any property that does not qualify as rural agricultural land will be considered urban agricultural land, at which point capital gains tax becomes applicable. Let's say you sold your parcel of land in a city; in that case, you would have to pay tax on the sale proceeds.

Under the Income-tax Act, urban agricultural land is considered a capital asset, and the tax treatment depends on how long the land was held before it was sold:

• Short-term capital gain (STCG): If the land was held for up to two years, gains are taxed under the owner's income tax slab.
• Long-term capital gain (LTCG): If held for more than two years, gains are taxed at 20% with indexation benefit. The taxpayer, who must be a resident individual, can also pay tax at 12.5% without the indexation benefit.

How to determine whether land is rural or urban?

An agricultural land situated beyond the jurisdiction of a municipality or cantonment board having a population of 10,000 or more is not treated as a capital asset if it does not fall within the following distances (to be measured aerially):

• Up to 2 kms from the local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 10,000 but does not exceed 100,000.
• Up to 6 kms from local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 1,00,000 but does not exceed 10,00,000.
• Up to 8 kms from the local limits of the municipality or cantonment board, if the population of such municipality or cantonment board exceeds 10,00,000.

If the agricultural land does not satisfy these conditions, it is treated as urban agricultural land and taxed accordingly, according to information available on the income tax department's website.

What if you inherited agricultural land?

In India, inherited property is not taxed at the time of inheritance. However, if the legal heir decides to sell the urban agricultural land later, then they would have to pay tax. As we discussed above, it does not apply to rural agricultural land sales.

In respect of assets inherited or received as gifts without consideration, the cost for capital gains purposes is taken as the cost incurred by the previous owners who actually acquired them for consideration.

Likewise, the period for which such property was held by all the previous owners, beginning with the person who had acquired it for consideration, shall be included in the holding period to determine the applicable tax.

How to report sale of agricultural land in ITR?

Since rural agricultural land is not a capital asset, any income arising from such land needs to be disclosed in Schedule EI (Exempt Income) of the income tax return in the relevant financial year.

Urban agricultural land, on the other hand, is treated as capital asset, and the sale of such assets needs to be disclosed in Schedule CG (capital gains) in ITR.

In non-audit cases, and where taxpayers don't have business income, they can file ITR-2 to report income from the sale of agricultural land. For those with business or professional income, ITR-3 can be filed instead (if you did not choose presumptive taxation scheme).