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Gains from sale of agricultural land can be tax exempt if invested in another farm

LiveMint logoLiveMint 11-09-2017 Parizad Sirwalla

I sold my ancestral property after subdivision, and bought agricultural land with all of the money I received from selling it. The ancestral property was purchased by my grandfather in 1978. After that it was divided between my father and his brothers. And we divided and sold the property that was our father’s share. What will be the tax implication of this transaction? Will I have to pay tax on it even though I have re-invested all of it in agricultural land?

—Veeresh Bangarshettar

Generally, sale of property would trigger taxes on the capital gains arising from the sale. We have presumed that the ancestral property is a piece of land. However, agricultural land can be excluded from taxation if specific parameters—such as usage of the land for agriculture, distance from local limits of a municipality and local population in the municipality—that are outlined in the Indian income tax laws (Section 2(14) of the Income-tax Act, 1961 ) are met.

You should analyse if all the specified parameters are satisfied in respect of the ancestral property sold by you. If these parameters are met and the ancestral land can be classified as ‘agricultural land’, the gains arising from sale of such agricultural land will not be taxable in your hands.

The gain that is exempt will need to still be disclosed in your income tax return, in the Exempt Income (EI) schedule under “others”.

If the ancestral land did not qualify as agricultural land, the gains, if any, resulting from the sale would be taxable.

Since you have inherited the land from your forefathers, the period of holding by your father and grandfather will also be considered for tax purposes as the period this land has been held by you. Since the land has been held by you and your forefathers for more than 24 months, the gains will then be taxable as long-term capital gain (LTCG).

LTCG is computed as the difference between net sale proceeds and the indexed cost of acquisition of the land. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income-tax department.

As this property was originally purchased in 1978 by your grandfather, you may opt to use the fair market value (FMV) of the property as on 1 April 2001 as the cost of the property, to compute the taxable capital gains.

You should, therefore, obtain a valuation of this asset as on 1 April 2001 and use either such FMV as on 1 April 2001 or the actual purchase cost, at your discretion. The resultant gain is subject to tax at the rate of 20.60% (plus applicable surcharge).

You can claim an exemption from taxes, under section 54B of the income-tax Act, if the entire LTCG arising from the sale of your ancestral land is re-invested by you within 2 years in the purchase of another land that is to be used for agricultural purposes (‘new asset’).

If not, the whole or part of the LTCG to the extent not re-invested in the new asset would be taxable in your hands at 20.60% (inclusive of education cess). Additionally, surcharge, if any, as applicable shall be levied.

Do note that this exemption is available only where the land that was sold was being used for agricultural purposes in the 2 years preceding the sale. Also, please note that if the new asset is sold within a period of 3 years from its purchase, there would be an additional tax impact on you, in respect of any LTCG that was claimed as tax exempt previously.

Parizad Sirwalla is partner (tax), KPMG.

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