CAPITAL GAIN ON CONVERSION OF AGRICULTURE LAND

CAPITAL GAIN ON CONVERSION OF AGRICULTURE LAND

Agricultural land may either be situated in a rural area or situated in anonrural area. The tax implication will differ in both the cases

In the case of Rural Agricultural Land does not constitute a Capital Asset, therefore Capital Gains Tax is not levied on the sale of Rural Agricultural Land. This will apply irrespective of the value of the transaction and the capital gains tax on saleof agricultural land will not be levied in any case.

Exemption: If Agriculture land is situated outside india its always a capital asset

(Easy interpretation: If you hold rural agricultural land, it does not qualify as a capital asset. Therefore, no capital gains or losses arise on the transfer or sale of rural agricultural land.)

In case of Urban Agriculture land, If you hold urban agricultural land, it qualifies as a capital asset, and capital gains arising on its sale or transfer.

  • The nature of capital gains, whether long-term or short-term, will depend on the holding period of the asset.
  • If you hold the land for more than 2 years, it will be considered a longterm capital gain and taxable at 20%.
  • If the holding period is less than 2 years, the gain will be a short-term capital gain and taxable at the slab rate.

SCENARIO 1

AGRICULTURE LAND(RURAL) ---Converted to--- NON-AGRICULTURE LAND ---SALE OF LAND

Capital Gains Tax in such a case would be computed in the same manner as is computed on sale of any other property. The Cost of Acquisition and Cost of Improvement would be deducted from the Sale Price to arrive at the Capital Gains

Full Value of consideration xxx
(-) Cost of acquisition (xxx)
(-) Cost of Indexation (xxx)
Capital Gains xxx

For computing capital gains, while determining COA ,Whose FMV must be taken, i.e., applicable to Agriculture land or non-Agriculture land ?

In case of Rural agriculture land,

Section 55 and the head of capital gains refers to the transfer of a capital asset. Agricultural land is not a capital asset under the scheme of Income-tax Act, 1961. FMV of Non-Agriculture(NA) land on the date of conversion may be taken into consideration, also the period of holding will be considered from the date of conversion. It may be desirable to get the valuation report from the Authorized Valuer.

Example: If Rural Agriculture Land and converted into NA Land 4 years back and the said NA land was sold in Jul 2021?

As it is converted four years ago means in 2017-18, FMV on date of conversion will be taken and for period of holding also from date of conversion to date of sale.

As it is held for more than 24 months it will be taxable as LTCG u/s112

Exemption: No Capital Gain on sale of agriculture land after conversion in NA land, if used for agriculture even after conversion.

Case Study: Shri Kamanahalli Pilla Reddy Nagesh Vs ITO (ITAT Bangalore)

SCENARIO 2

AGRICULTURE LAND(URBAN) --- NON-AGRICULTURE LAND -- SALE OF LAND

whether it is possible to take COA as on the date the Urban Agriculture land was converted into Non agriculture land?

As per Section 55, Urban Agriculture land qualifies to be a capital asset and will attract capital gains, Therefore FMV(if acquired before 01/04/2001) or COA as on date of acquisition (Whichever is higher) of Urban agriculture land has to be taken as the COA. It may be desirable to get the valuation report from the Authorized Valuer.

SCENARIO 3

RURAL AGRICULTURE LAND-------------------- SOLD.

Rural agricultural land does not qualify as a capital asset. Therefore, no capital gains or losses arise on the transfer or sale of rural agricultural land.

Case Study: The case study of Ms.Janki Hitendrakumar Patel.

Illustration 1

Mr. A purchased agricultural land which is located 5km away from the place where the population is less than 1,00,000 on 01/05/2001 for 1,50,000 and on 01/07/2003 having FMV 3,00,000 they converted into non agriculture land and sold it for the consideration of 5,00,000 on 01/12/2005.

Illustration 1

As per the above criteria, the land will be treated as rural land.

Computation of Capital gain

Computation of Capital gain

Exemptions

1. Exemption can be claimed under section 54B in respect of capital gains arising from the transfer of capital assets.

Conditions,

  • Benefits available only for individuals and HUF
  • Agriculture land must be used for agricultural purposes for at least two years.
  • Within a period of 2 years from the date of transfer of old land, the taxpayer should acquire another agricultural land.
  • If the new agricultural land is not purchased before the due date of the filing of the income tax return, the Capital Gains amount should be deposited in the Capital Gains Account Scheme which can later be withdrawn at the time of purchase of agricultural land.
  • Exemption: Investment in agricultural land or capital gain, whichever is lower

2. Exemption can be claimed under section 54F in respect of capital gains arising from the transfer of capital assets.

Conditions,

  • Benefits available only for individuals and HUF.
  • The capital gain arises from transferring any long-term capital assets other than the residential house.
  • The assessee must not own more than one house.
  • The house must be purchased within one year before or two years after the date at which such capital asset is sold.
  • If the house is being constructed, the construction must be completed within 3 years from the sale of such a capital asset.
  • The house must not be sold within 3 years; else, the exemption will be withdrawn.
COA for capital gain computation

Disclaimer:

“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation”

Prepared On:
17/10/23



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