Sale of Agricultural Land: Capital Gains Tax Rules
- Asharam Swain
- 5 days ago
- 9 min read
The taxability of agricultural land in India depends on its classification as rural or urban. While rural agricultural land enjoys full exemption from capital gains tax, urban agricultural land is treated as a capital asset under the Income Tax Act, 1961. The sale of such land can attract short-term or long-term capital gains tax depending on the holding period. However, various exemptions and reliefs, including those under Sections 10(37) and 54B, allow taxpayers to reduce or completely avoid the tax burden if the proceeds are reinvested or the sale meets specific conditions.
Table of Contents
Classification of Agricultural Land under Income Tax Act
Under the Income Tax Act, agricultural land is classified based on its location and usage. Land situated in rural areas is considered rural agricultural land and is not treated as a capital asset, which means gains from its sale are exempt from capital gains tax. Conversely, land located within the limits of a municipality or within specified distances from urban areas is termed urban agricultural land and is treated as a capital asset. The classification depends on factors such as the population of the surrounding area, the distance from the nearest municipality, and the usage of the land for agricultural purposes.
Capital Gains Tax Rules on Sale of Agricultural Land
The taxability of income from the sale of agricultural land depends on whether it is classified as rural or urban. The sale of rural agricultural land is exempt from capital gains tax. However, if the land falls under the definition of urban agricultural land, it is treated as a capital asset, and the profit earned from its sale attracts capital gains tax under Section 45 of the Income Tax Act. The gain is computed by deducting the indexed cost of acquisition and improvement from the sale consideration.
Short-Term vs Long-Term Capital Gains on Urban Agricultural Land
When it comes to selling urban agricultural land, the tax treatment depends on how long the property has been held before the sale. If the land is sold within 24 months of purchase, the gains are classified as short-term capital gains (STCG). These gains are added to the individual’s total income and taxed according to the applicable income tax slab rate. This means the tax burden may vary from person to person, depending on their income bracket. Short-term gains do not qualify for indexation benefits, which can result in a higher taxable amount compared to long-term holdings.
If the land is held for more than 24 months before being sold, the profit is treated as a long-term capital gain (LTCG). Long-term capital gains on the sale of urban agricultural land are taxed at a flat rate of 20% with the benefit of indexation. Indexation is an important relief mechanism that adjusts the cost of acquisition of the asset to account for inflation. This adjustment reduces the overall taxable gain, thereby lowering the tax liability.
For example, if a person purchased urban agricultural land for ₹40 lakh in 2018 and sold it in 2025 for ₹80 lakh, the indexed cost of acquisition would be adjusted based on the Cost Inflation Index (CII). After applying indexation, the effective taxable profit would reduce significantly, ensuring that the taxpayer pays tax only on real gains after considering inflation.
Additionally, the Income Tax Act provides certain exemptions to taxpayers who reinvest the proceeds from the sale of agricultural land. Under Section 54B, an exemption can be claimed if the sale proceeds are reinvested in the purchase of new agricultural land within two years from the date of sale. This benefit is available only if the land sold and the new land purchased are both used for agricultural purposes.
Similarly, Section 54F provides relief when the sale proceeds are reinvested in the purchase or construction of a residential property, subject to certain conditions. The exemption under Section 54F is available proportionately, depending on the amount reinvested in the new residential property. However, to retain the benefit, the newly purchased property must not be sold within three years of acquisition.
In short, holding period, type of reinvestment, and proper documentation are key factors in determining the tax liability and eligibility for exemptions on the sale of urban agricultural land. Understanding these provisions can help taxpayers plan their transactions more efficiently and minimize capital gains tax through legitimate means such as indexation and reinvestment under relevant sections.
Exemptions on Sale of Agricultural Land under Section 10(37)
Section 10(37) provides complete exemption on capital gains arising from the compulsory acquisition of urban agricultural land by the government or any approved authority. The conditions for this exemption include that the land must have been used for agricultural purposes for at least two years prior to acquisition, and the compensation must be received after April 1, 2004. The exemption applies only to individual and Hindu Undivided Family (HUF) taxpayers.
Section 54B Exemption on Reinvestment in New Agricultural Land
Section 54B allows taxpayers to claim exemption from capital gains tax when the sale proceeds from an agricultural land are reinvested in purchasing another agricultural land. The exemption applies to individuals and HUFs who have used the sold land for agricultural purposes for at least two years prior to its sale. The new agricultural land must be purchased within two years from the date of sale, and the exemption is limited to the capital gains amount or the reinvested amount, whichever is lower. If the new land is sold within three years, the exemption claimed earlier becomes taxable in that year.
How to Report Sale of Agricultural Land in ITR
The sale of agricultural land must be accurately reported under the Capital Gains schedule of the Income Tax Return (ITR). Rural agricultural land sales that are fully exempt should still be disclosed under the Exempt Income section for transparency. For urban agricultural land, taxpayers must report the sale consideration, cost of acquisition, cost of improvement, and any exemptions claimed under sections like 54B or 10(37). Filing through reliable platforms like TaxBuddy ensures correct reporting with auto-calculation of capital gains and deduction eligibility.
TDS Applicability on Sale of Agricultural Land
Tax Deducted at Source (TDS) is applicable under Section 194-IA if the sale consideration of the agricultural land (other than rural land) exceeds ₹50 lakh. The buyer must deduct 1% TDS on the sale value and deposit it with the government using Form 26QB. For rural agricultural land, no TDS is applicable since such transactions are exempt from capital gains tax. Both parties should ensure proper documentation and TDS certificates for compliance during tax filing.
Practical Example – Sale of Urban Agricultural Land and Tax Calculation
Suppose a taxpayer sells an urban agricultural land in FY 2025-26 for ₹80 lakh, purchased in FY 2015-16 for ₹35 lakh. The indexed cost of acquisition using the Cost Inflation Index (CII) is ₹35 lakh × (363/254) = ₹50 lakh. The long-term capital gain is ₹30 lakh (₹80 lakh – ₹50 lakh). The taxpayer invests ₹20 lakh in a new agricultural land within the same year. Under Section 54B, the exemption is ₹20 lakh, and the remaining ₹10 lakh is taxable as long-term capital gains at 20%, resulting in a tax liability of ₹2 lakh.
Key Considerations Before Selling Agricultural Land
Before selling agricultural land, taxpayers should determine whether it qualifies as rural or urban land to assess tax implications accurately. They should verify the holding period to identify short-term or long-term gains, maintain all documentation related to ownership and sale, and check eligibility for exemptions under sections like 10(37) and 54B. Consulting a tax expert or using a platform like TaxBuddy ensures proper calculation, reporting, and compliance with TDS and capital gains provisions.
How TaxBuddy Simplifies Filing for Agricultural Land Sales
Filing capital gains on the sale of agricultural land can be complex, especially when multiple sections and exemptions apply. TaxBuddy automates the entire process by identifying the correct classification of the land, computing indexed costs, and applying eligible exemptions under the right sections. Its AI-driven tools detect data mismatches between AIS and Form 26AS, ensuring accurate filing and maximum tax savings. TaxBuddy’s expert-assisted filing service further helps in document verification and compliance checks, preventing errors and potential notices.
Conclusion
The taxation of agricultural land under the Income Tax Act depends on its classification, location, and usage. While rural agricultural land sales remain exempt, urban agricultural land attracts capital gains tax with potential relief under sections like 10(37) and 54B. Proper reporting and timely reinvestment can significantly reduce tax liability. To ensure accurate calculations, claim eligible exemptions, and file without errors, it’s best to rely on professional assistance.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Is agricultural land considered a capital asset under the Income Tax Act?
Agricultural land is classified as a capital asset only if it lies within specified urban limits. Rural agricultural land is excluded from this definition, meaning its sale does not attract capital gains tax. In contrast, the sale of urban agricultural land—situated within municipal limits or nearby specified distances—is treated as a transfer of a capital asset and is taxable under capital gains provisions.
Q2. How is urban agricultural land defined?
Urban agricultural land refers to land located within the jurisdiction of a municipality or within certain distances—ranging from 2 km to 8 km—from municipal limits, depending on the local population. The Central Government notifies these limits periodically. Any land falling within these parameters is treated as urban agricultural land and taxed accordingly upon sale.
Q3. Are there any exemptions for compulsory acquisition of agricultural land?
Yes. Under Section 10(37), capital gains arising from the compulsory acquisition of urban agricultural land are fully exempt if the land was used for agricultural purposes for at least two years before acquisition. The compensation received must relate to agricultural land owned by an individual or HUF to qualify for this exemption.
Q4. Can both individuals and HUFs claim exemption under Section 54B?
Both individuals and Hindu Undivided Families (HUFs) are eligible to claim exemption under Section 54B if they sell agricultural land used for farming for at least two years and reinvest the sale proceeds in new agricultural land within two years. This exemption helps farmers and landowners preserve capital by reinvesting in similar assets.
Q5. Is TDS applicable when selling agricultural land?
TDS under Section 194-IA is applicable if the sale value of urban agricultural land exceeds ₹50 lakh. The buyer must deduct 1% TDS before making payment. However, no TDS applies to the sale of rural agricultural land since it is not categorized as a capital asset under the Income Tax Act.
Q6. How is capital gain calculated on the sale of agricultural land?
Capital gain is determined by subtracting the indexed cost of acquisition and improvement from the sale consideration. If the land is held for more than 24 months, the resulting gain qualifies as a long-term capital gain, taxed at 20% with indexation benefits. For shorter holding periods, the gain is taxed as short-term income at normal slab rates.
Q7. Can exemption under Section 54B be claimed multiple times?
Yes, taxpayers can claim Section 54B exemption multiple times as long as each transaction independently meets the eligibility conditions—namely, that the sold land was used for agriculture for at least two years and that the reinvestment in new agricultural land occurs within two years of sale.
Q8. Can agricultural land inherited from parents be sold without paying tax?
Inherited rural agricultural land can be sold tax-free since it is not considered a capital asset. However, if the inherited land is urban, capital gains tax applies. The cost and holding period of the previous owner (the parent) are considered when calculating the gain and determining whether it is short-term or long-term.
Q9. What happens if the new agricultural land purchased is sold within three years?
If the land purchased to claim exemption under Section 54B is sold within three years of purchase, the earlier exemption is reversed. The amount exempted previously is added back to the taxpayer’s income as short-term capital gain in the year of sale of the new property.
Q10. Are registration and stamp duty charges deductible when calculating capital gains?
Yes, registration fees, stamp duty, and brokerage charges paid during purchase or improvement of land are treated as part of the cost of acquisition or cost of improvement. These expenses can be deducted from the sale price when computing total capital gains, thereby reducing taxable income.
Q11. How to report sale of agricultural land in ITR through TaxBuddy?
TaxBuddy makes reporting the sale of agricultural land simple. After uploading the sale deed and purchase documents, the platform automatically identifies whether the land is rural or urban, calculates indexed capital gains, and applies relevant exemptions like Sections 54B or 10(37). A tax expert reviews every computation to ensure compliance before submission.
Q12. What is the tax treatment of agricultural income itself?
Agricultural income is fully exempt under Section 10(1) of the Income Tax Act. However, if a taxpayer’s total income (including non-agricultural income) exceeds the basic exemption limit, agricultural income is used for rate calculation under the partial integration rule. This means it influences the applicable tax slab rate even though it remains non-taxable itself.
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