Capital Gains Exemption on Sale of Agricultural Land

What is an agricultural land?

There are two types of Agriculture land

Now, it is very important to understand the meaning of Rural Agriculture land and Urban Agriculture land.

1. Rural Agricultural land It means an agricultural land in India -

(a). If situated in any area which is comprised within the jurisdiction of a municipality and its population is less than 10,000, or
(b). If situated outside the limits of municipality,then situated at a distance measured-
1. more than 2 kms, from local limits of municipality and which has a population of more than 10,000 but not exceeding 1,00,000
2. more than 6 kms, from local limits of municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000
3. more than 8 kms,from local limits of municipality and which has a population of more than 10,00,000.

2. Urban Agricultural land: Urban agricultural is a land located in specified location and used for agricultural purposes.

Now what is specified location in regards to urban agricultural land-

a.) If situated in any area which is comprised within the jurisdiction of a municipality and its population is upto 10,000, or
b.)If situated outside the limits of municipality,then situated at a distance measured-
1. upto 2 kms, from local limits of municipality and which has a population of more than 10,000 but not exceeding 1,00,000
2. upto 6 kms, from local limits of municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000
3. upto 8 kms,from local limits of municipality and which has a population of more than 10,00,000.

Shortest distance from jurisdiction of a municipality	Population	Type of Agriculture Land	Shortest distance from jurisdiction of a municipality	Population	Type of Agriculture Land
Within the municipality	Less than 10,000	Rural land	Within the municipality	Less than 10,000	Urban land
More than 2 Kms	>10,000 upto 1,00,000	Rural land	upto 2 Kms	>10,000 upto 1,00,000	Urban land
More than 6 Kms	>1,00,000 upto 10,00,000	Rural land	upto 6 Kms	>1,00,000 upto 10,00,000	Urban land
More than 8 Kms	>10,00,000	Rural land	upto 8 Kms	>10,00,000	Urban land

A Rural agricultural land does not qualify to be a capital asset, hence no capital gains/loss arise on sale or transfer of rural agricultural land.
An urban agricultural land qualifies to be a capital asset, hence capital gains shall arise on sale or transfer of urban agricultural land.
1. Nature of capital gain like long term or short term will depend upon the no. of years asset is held by the assessee.
2. If the period of holding is more than 2 years then the capital gain arising will be termed as long term capital gain. If the holding period is shorter than 2 years, then the gain arising is termed as short term capital gain.
3. Long term capital gain shall be taxable at 20% whereas short term capital gain is chargeable at slab rate.

Particular	Amount
Full value of consideration (FVOC)	XXX
Less :- Expenses incurred in connection with transfer	(XXX)
Net Consideration	XXX
Less:- Cost of Acquisition	(XXX)
Less :- Cost of Improvement	(XXX)
Capital Gain/Loss	XXX

Urban agricultural land is although a capital asset but any capital gain arising from the compulsory acquisition of such land shall be exempt as per Section 10(37) if certain conditions mentioned in that section are satisfied.
The exemption u/s 54B is available in respect of capital gains arising from transfer of agricultural land. This exemption is available when capital gain arising on sale of urban agriculture land & such capital gain is used for another agriculture land.
If you are into buying and selling land regularly or in the course of your business, i.e., if you hold agricultural land as stock in trade then in such a case, any gains from its sale are taxable under the head Business & Profession, i.e., no capital gains shall be chargeable on such agricultural land.

The very first condition is that there needs to transfer of urban agriculture land.
Eligible assessee – Individual & HUF
Such land must have been used for agricultural purposes by the assessee, being an individual or his parents, or a HUF in the 2 years immediately preceding the date of transfer.
Assessee shall purchase another urban agriculture land with two years from the date of transfer.
Assessee has an option to deposit the amount of capital gain under CGAS if investment is not made before the date of filing of income tax return.Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.
Assessee shall purchase another agricultural land (urban or rural) within 2 years from the date of transfer.
If such investment required is not made before the date of filing of return of income, then the capital gain has to be deposited under the CGAS. Amount utilized by the assessee for purchase of new asset and the amount so deposited shall be deemed to be the cost of new asset.

If cost of new agricultural land ? capital gains, entire capital gains is exempt.
If cost of new agricultural land < capital gains, capital gains to the extent of the cost of new agricultural land is exempt.

Consequences:

Where the amount deposited in capital gains accounts scheme is not utilised for the purchase of the agricultural land within specified period then the amount not so utilised shall be charged as capital gains of the previous year in which the period of 2 years from the date of transfer of the original asset expires.
Where the new agricultural land is transferred within a period of 3 years of its purchase, then the capital gains which was exempt earlier shall be reduced from the cost of the new agricultural land for the purpose of computation of capital gains in respect of the new agricultural land and it will be a short term capital gain .
On the other hand , if the agricultural land acquired by the assessee is rural agricultural land,there will be no capital gain even if it is sold within a period of 3 years because rural agricultural land is not a ‘capital asset’.