Selling agricultural land can result in a substantial capital gain, especially when the land is located in or around urban areas. While agricultural income is exempt under the Income-tax Act, 1961, the sale of agricultural land can sometimes attract capital gains tax, particularly when it qualifies as a capital asset. However, with proper planning, this tax can be legally saved by availing exemptions provided under the law.
This article explores how taxpayers can save Long-Term Capital Gains (LTCG) arising from the sale of agricultural land. Relevant Section for the purpose of Capital Gain exemption are Section 54B, Section 54F and Section 54EC, which we are going to discuss in this article.
Is Agricultural Land a Capital Asset?
The taxability of capital gains depends on whether the agricultural land sold is a “capital asset” under the Income-tax Act.
✅ Not a Capital Asset (Exempt):
Rural agricultural land in India is not considered a capital asset if:
- It is situated beyond 8 km from the limits of a municipality or cantonment board, and
- The population of such area is below the prescribed threshold.
➡️ Sale of such land is fully exempt from capital gains tax. (Please Refer definition of Capital Assets under Section 2 (14) of the Income Tax Act for detailed understanding).
❌ Capital Asset (Taxable):
If the agricultural land is located in an urban area, it is treated as a capital asset, and the gains from its sale are taxable.
What is Long-Term Capital Gain (LTCG)?
If the urban agricultural land is held for more than 24 months before sale, the resulting gain is termed Long-Term Capital Gain and is taxed at 20% with indexation benefits or Opt for a concessional tax rate of 12.5% without indexation.
This flexibility allows taxpayers to choose the most tax-efficient option based on their cost of acquisition, inflation benefit, and overall financial planning. The decision should be based on comparative calculations for optimal savings.
How to Save LTCG on Sale of Agricultural Land?
The Income-tax Act offers multiple exemptions to save LTCG. Here’s how:
1.⃣ Section 54B – Investment in New Agricultural Land
This section provides a specific exemption for taxpayers selling agricultural land and buying another agricultural land.
Conditions:
- The land sold should be used for agricultural purposes by the assessee or their parent for at least 2 years preceding the sale.
- The assessee (individual or HUF) should purchase new agricultural land (urban or rural) within 2 years of sale.
- The new land must not be sold for 3 years.
- If the purchase is pending at the time of filing return, the amount of capital gain must be deposited in the Capital Gains Account Scheme before the due date under Section 139(1).
Exemption Limit:
- Exemption is lower of the capital gains or amount invested in new agricultural land.
Key Highlight:
The new agricultural land can be rural or urban – the law does not restrict the location for reinvestment. Meaning thereby even if the new agriculture land is situated in rural area qualify for exemption under section 54B provided that other condition of section are fulfilled.
2.⃣ Section 54F – Investment in Residential Property
If the agricultural land is not eligible under Section 54B (e.g., not used for agricultural purposes), taxpayers can still claim exemption under Section 54F, provided:
- The assessee invests the net consideration in one residential house in India within 2 years (or constructs within 3 years).
- The taxpayer should not own more than one residential house on the date of transfer.
3.⃣ Section 54EC – Investment in Specified Bonds
If the land qualifies as a capital asset and the assessee does not wish to reinvest in land or house property, Section 54EC offers another route:
- Invest the capital gains (not the full sale value) in NHAI or REC bonds within 6 months of sale.
- Maximum investment allowed: ₹50 lakhs.
- Lock-in period: 5 years.
4. Capital Gains Account Scheme (CGAS)
If you haven’t yet utilized the capital gains for reinvestment by the due date of ITR filing, deposit the amount in a Capital Gains Account Scheme (CGAS) to preserve your eligibility for exemption.
📌 Conclusion
With informed planning and awareness of the available provisions, taxpayers can save a significant amount of LTCG tax on sale of agricultural land. Sections 54B, 54F, and 54EC are effective tools to minimize tax burden and reinvest the gains meaningfully.
It is strongly advised to consult a Chartered Accountant or tax professional to ensure proper compliance, documentation, and optimal tax planning based on your specific case.
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Disclaimer: For educational and informational purposes only. Consult a tax professional before making decisions. The author is not responsible for any losses incurred
Article by CA. Rahul Dwivedi, B.Com. FCA. and founder of D Rahul & Associates, Navi Mumbai. You can reach Author at ca.rahuldwivedi@gmail.com or 9004485377.