Context:
Tax treatment on sale of agricultural land in India varies between whether it is considered to be a rural or urban agricultural land. In India, the sale of rural agricultural land is tax exempt under capital gains, and sale of urban agricultural land is subject to capital gains tax. It is divided on specific criteria related to population and distance.
What is Rural Agricultural Land?
Land is rural agricultural land if it falls outside municipal or cantonment board limits based on the population criteria of the latest census (2011).
- The distance from the municipal or cantonment board limits must be:
- 2 km if the population is between 10,000 and 100,000.
- 6 km if the population is between 100,000 and 1 million.
- 8 km if the population exceeds 1 million.
- Straight line distance is taken for qualification and not the road distance.
Tax Consequences: Agricultural Land Rural vs. Urban
- Rural agricultural land is exempted from capital gains tax.
- Urban agricultural land is liable for tax:
- STC Gains: If sold within 2 years, gains are taxed at the seller’s income tax slab rate.
- LTCG: Sold after 2 years, then gains would be taxed at 12.5%.
- Deductible expenses: Brokerage and legal fees can reduce taxable gains.
State Laws & Restrictions on Sale
- Some states, like Maharashtra and Gujarat, restrict agricultural land sales to non agriculturists without prior approval from local authorities.
- Ceiling limits exist on how much agricultural land an individual can own.
- State specific definitions of agricultural land may include cultivation, horticulture, grazing, and dwelling sites for farmers.
Court Criteria for Agricultural Land Classification
- The determination of whether the land is agricultural or non-agricultural becomes more complex in cases of dispute and cannot depend solely on revenue records of the land.
- Official classification of land, land revenue assessment status, actual use by the owner for cultivation, intention of ownership to cultivate or for development, and character of other lands in the neighborhood, that is, agricultural, residential, commercial, and industrial.
- Rural agricultural land is exempt from taxation if sold.
- Population and distance requirements are highly regulated.
- For urban land sales, the state imposes capital gains tax, so accurate classification is a priority. Lastly, it’s also based on state law and judicial decisions.
