Capital Gain on the Sale of Rural Agricultural Land as per Income Tax

The foundation of the Indian economy is agriculture, which generates food for the country and employs a large number of people. Land used for agricultural purposes is referred to as agricultural land. There are two categories of agricultural land from the standpoint of income tax. These are urban and rural agricultural land. In this article, we will focus specifically on rural agricultural land and explain how the capital gain on its sale is treated as per the Income Tax rules.

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Table of Content

What is Rural Agricultural Land?

Capital Gain on the Sale of Rural Agriculture Land

Disclosure of Sale of Rural Agricultural Land in ITR

Steps to Report the Sale of Rural Agricultural Land

Conclusion

Most Asked Questions

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What is Rural Agricultural Land?

A piece of land is defined as rural agricultural land in the following circumstances:

(a) If located in a region that falls within a municipality's jurisdiction and has fewer than 10,000 residents, or

(b) If located outside the municipality's boundaries, then at a distance calculated from:

• more than 2 kilometers from the municipality's local limits and with a population of 10,000 or more but not more than 1,000,000;

• more than 6 kilometers from the municipality's local limits and with a population of 1,000,000 but not more than 1,000,000;

• more than 8 kilometers from the municipality's local limits and with a population of more than 100,000.

Capital Gain on the Sale of Rural Agriculture Land

Land used for agriculture in rural areas is not regarded as a capital asset. As a result, there is no capital gain tax associated with the sale or transfer of such agricultural rural land. The capital gain from the sale of agricultural land must still be reported on your ITR under schedule exempt income, though. The following formula can be used to determine the capital gain on the sale of agricultural land:

Capital gains= Sale price- Acquisition and improvement costs

Investors benefit from this exclusion since it enables them to keep the full sale profit without any tax deductions. Because you can invest in agricultural land located outside of certain metropolitan limits and because it is exempt from capital gains tax, it is a popular choice for investors.

Disclosure of Sale of Rural Agricultural Land in ITR

Gains from rural agricultural land are not subject to taxes since, according to the Income-tax Act, it is not a capital asset. However, this does not mean that the seller should not report the sale to the tax department. The income from agricultural land must be reported in Schedule EI of the ITR and is exempt under Section 10(1).

Steps to Report the Sale of Rural Agricultural Land

It is crucial to include the sale of rural agricultural land in your income tax return for correct disclosure and to prevent any future examination, even though it is tax-exempt. Here's how to accomplish it:

Step 1: Determine which income tax return (ITR) Form is relevant

The following forms are pertinent for reporting agricultural income or exempt income for the majority of individual taxpayers:

• ITR-1 (Sahaj): People who earn up to Rs. 50 lakhs from a salary, one home, other sources (interest, etc.), and other sources utilize this form. There isn't a dedicated field on this form for reporting the sale of rural agricultural land, though.

• ITR-2: For people and HUFs without business or professional income, this form is used. It can be used to reveal the sale of rural agricultural land and contains fields for reporting exempt income.

Step 2: Complete the basic information

Log in to the Income Tax Department's e-filing portal (https://www.incometax.gov.in/iec/foportal/) and choose the relevant ITR form according to your sources of income. Enter your basic information, including your personal information and your sources of income.

Step 3: Go to the section under "Exempt Income."

Find the section on reporting exempt income on the ITR form. Part B – TI – Computation of Total Income and Schedule EI – Details of Exempt Income (Income not to be included in total income) are the sections in ITR-2 that provide this information.

Step 4: Enter the sale's details

Enter the specifics of the sale of rural agricultural land in the "Schedule EI" section. You ought to supply:

• Type of Income: Describe the kind of income that is exempt. You might designate it as "Exempt Income from Sale of Rural Agricultural Land" for the sale of rural agricultural land.

• Amount: Enter the money received or the proceeds from the land sale.

Step 5: Verify and submit

Once the required information has been entered, check the full form to make sure all the information is correct. Submit the return after confirming the form with one of the available alternatives (Aadhaar OTP, EVC, or Digital Signature Certificate).

For your records, preserve all pertinent papers, including the purchase agreement, sale deed, and evidence of the land's rural status. These records can be needed if the tax authorities are looking into the matter. To guarantee correct reporting and compliance, think about speaking with a tax professional if you have a complicated case or are unclear about the procedure.

Conclusion

Regarding income tax, India's rural agricultural land has a special status. To ensure compliance with tax rules and to prevent needless hassles, it is essential to understand where and how to disclose the sale of such land in your income tax return. This article offers detailed insight into the process of including the sale of rural agricultural land in your income tax return. If you still have some questions or doubts when considering the sale of rural agricultural land, it is best to consult an expert.

FAQ

Q1. Is the sale of agricultural land considered a capital gain?

As per Section 45 of the Income Tax Act, rural agricultural land in India is not deemed as a capital asset. For this reason, the Capital Gains tax is not applicable to its sale proceed.

Q2. Will rural agricultural land be regarded as a capital asset?

Urban agricultural land can be considered a capital asset, whereas rural agricultural land does not come in this category.

Q3. Is agricultural land exempt from tax?

The only rural land that is tax-exempt is agricultural land. Sections 54B, 54EC, and 54F may exclude you from paying taxes on urban agricultural land.

Q4. Is TDS applicable while buying agricultural land?

It is necessary to deduct TDS u/s 194IA @ 1% while purchasing urban agricultural land. Notably, no TDS is applicable during the purchase of such land since it is not a capital asset land.

Q5. Is the sale of rural agricultural land fully exempt from capital gains tax?

Yes, rural agricultural land is not treated as a capital asset under Section 2(14), so any gain from its sale is fully exempt from capital gains tax.

Q6. How is rural land defined under Section 2(14) of the Income Tax Act?

Rural land must be situated outside municipal limits and have a population below certain thresholds. Its location and distance from urban areas determine its tax treatment.

Q7. Does exemption differ for inherited rural agricultural land?

Yes, the exemption still applies if the inherited land qualifies as rural under Section 2(14). The holding period of the previous owner is also considered for taxation.

Q8. Can capital gains exemption be claimed under Section 54B for rural land?

Section 54B allows exemption if the sale proceeds are reinvested in agricultural land within two years, and the land was used for agricultural purposes by the taxpayer.

Q9. Is indexation benefit applicable on rural land if it’s taxable?

If the land qualifies as rural, it's not a capital asset—so no indexation or tax applies. For urban land or if conditions change, indexation applies to long-term capital gains.

Q10. Does location within municipal limits affect the taxability of agricultural land?

Yes, agricultural land located within certain municipal limits becomes a capital asset and is subject to capital gains tax if sold.

Q11. How to report the sale of exempt rural agricultural land in ITR?

Though exempt, it's good practice to disclose such transactions in ITR under exempt income for better transparency and record-keeping.

Q12. Can rural land be held under HUF for tax-free capital gain benefit?

Yes, HUFs are also eligible for exemption if the land meets rural criteria. The definition of "rural" remains the same for individuals and HUFs.

Q13. Does converting agricultural land into non-agricultural land change its tax status?

Yes, conversion to non-agricultural land may classify it as a capital asset, making it taxable on sale under capital gains provisions.

Q14. What documents are needed to prove land as rural and exempt?

Land records, village maps, municipality certificates, and revenue department reports may be required to establish the rural status of the land.

Q15. Can agricultural income from sold rural land impact ITR filing?

If you earn agricultural income along with salary or other income, you must declare it even if it's tax-exempt, as it may affect tax rate applicability.

Q16. Are NRIs eligible for exemption on rural land sale in India?

Yes, NRIs are also eligible for exemption if the land qualifies as rural per Indian laws. However, TDS might be applicable at the time of sale.

Q17. Does reinvestment in other rural land qualify for capital gains exemption?

If the land qualifies as a capital asset (urban), reinvestment in agricultural land can help claim exemptions under Sections 54B or 54F, depending on use.

Q18. How does capital gain from rural land sale affect other deductions like 80C or 80G?

Since rural land sale is exempt, it doesn’t reduce your taxable income or affect deductions. But donations or investments made from proceeds can still qualify under 80G or 80C if eligible.

Q19. Is agricultural land bought in joint names still eligible for exemption?

Yes, if all owners meet the criteria and the land qualifies as rural, exemption is available even for jointly owned land.