How are gains from farm land sale taxed?

I am a 30-year-old software engineer working in Kochi and have recently received ₹10 lakh from the sale of a share of agricultural property. Is this amount taxable? Also, if I was to purchase a house with the proceeds, can it be set off for income tax purposes?

—Name withheld on request

Taxability on the sale of agricultural land will depend on the status/location of the land that has been sold. Agricultural land in a rural area is not considered a capital asset and therefore gain on sale of the same is not subject to income tax.

On the other hand, the gain on a sale of urban agricultural land is subject to income tax under the head ‘capital gains’. If the holding period of the urban land is under three years, the capital gains will be categorized as short-term. If it is more than three years, the capital gains will be categorized as long-term.

Short-term capital gains are taxable at applicable tax rates and no exemption is available against the same.

Long-term capital gains are taxable at 20%. Further, an exemption under section 54F of the income tax Act is available on the long-term capital gains earned from selling a capital asset other than a house property. So, in your case, if you have a long-term capital gains from sale of urban agricultural land, tax exemption under section 54F will be available if you are investing the proceeds from the sale in the purchase of a residential house, subject to the fulfilment of the following conditions:

The residential house is purchased within a period of two years from the sale of the agricultural land.

The full amount received by you from sale proceed is invested in the purchase of the residential house (If full amount is not invested, then the exemption will be available only on a proportionate basis).

If the amount is not invested within six months, the amount will need to be parked with a bank in the ‘capital gains account scheme’.

Amit Bhachawat is chief financial officer of India Mortgage Guarantee Corporation