I own some farm land for the past 30 years. How can I save tax on the sale of this land? Can I benefit from buying a residential property? 

—Name withheld on request


As per the provisions of the Income Tax Act 1961, agricultural land is not considered as a capital asset, unless it satisfies the following conditions:

a)Land is situated in any area within the jurisdiction of a municipality or a cantonment board having population of not less than 10,000; or

b)Land is situated in area within the specified distance (ranges from 2 km to 8 km), measured aerially, from the local limits of any municipality or cantonment board (with population ranging from 10,000 to 1 million).

Based on the limited facts available, it is not clear whether the agricultural land owned by you qualifies as a capital asset or not. In case, the agricultural land does not satisfy the aforesaid conditions, then the same is not considered as capital asset, and gains arising from its  sale shall not be subject to tax.

In case the agricultural land qualifies as a capital asset, the same shall be considered as long-term capital asset (LTCA), since the period of holding is more than 24 months and the sale income of such agricultural land will be subject to long-term capital gain (LTCG). Further, one may claim the following deductions from resultant LTCG:

Section 54B: Where the LTCG arises from the transfer of land which was being used for agricultural purposes and the assessee has, within a period of two years after that date, purchased any other land for agricultural purposes, then a proportionate deduction will be available to the extent of LTCG invested as prescribed. Further, in case the LTCG couldn’t be invested for purchase of the new land till the date of furnishing the return under section 139 of the Act, then such amount can be deposited before the due date of filing tax return, in a specified Capital Gain Account Scheme (CGAS) account with authorized banks and utilized in the manner prescribed, to avail of the deduction.

Section 54EC: LTCG to be invested in notified bonds having prescribed conditions, within 6 months from the date of transfer of LTCA. Such capital gain amount invested shall be eligible for exemption, up to a maximum of 50 lakh during the financial year in which LTCA is sold/ subsequent FY.

Section 54F: Net sale proceeds of the agricultural land are invested in purchase  or construction of another property within the specified timelines, provided that the person doesn’t hold more than one residential property, in addition to the new house, on the date of sale of LTCA. Where the entire net sale proceeds are not invested and only a part amount is invested, the deduction u/s 54F will be available only for the proportionate LTCG. 

Further, in case the net sale proceeds couldn’t be invested for purchase or construction of new house till the date of furnishing the return, then such amount can be deposited in a specified CGAS bank account with authorized banks and utilized in the manner prescribed, to avail of the deduction.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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