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In many situations, capital gains arising from sale of agricultural land can attract tax

LiveMint logoLiveMint 01-05-2017 Parizad Sirwalla

My father sold some agricultural land (rural area in Kerala) this year. He had bought this land in 1975 for about Rs1,500 (Rs1,500 for 2.64 acre). Is this transaction exempt from capital gains tax?

— Rameesh Thaithodiyil

Generally, land qualifies as a capital asset and hence gain on sale of the same would be subject to capital gains. Further, there are some parameters (such as distance from local limits and local population in the municipality and usage of the land) that are outlined in the Indian income tax laws (Section 2(14) of the Income-tax Act, 1961) to determine if the agricultural land in question can be excluded from the definition of ‘capital asset’.

If this land qualifies for being excluded from the definition of ‘capital asset’, the gains arising from sale of such land will not be taxable.

Assuming that the land belonging to your father does not satisfy this exclusion criteria, and hence qualifies as a capital asset, then the gain arising from the sale of the agricultural land by your father would be taxable. This property would qualify as a long-term capital asset since it is held for more than 24 months and he can, therefore, apply the indexed cost of acquisition when computing the long-term capital gain (LTCG) that is taxable.

It may be possible for him to claim an exemption from taxes, under section 54B of the Act, if the entire LTCG arising from the sale is re-invested by him within 2 years in the purchase of another agricultural land (‘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 his hands at 20.6% (inclusive of education cess). Additionally, surcharge, if any, as applicable shall be applicable.

Do note, 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, if the new asset is sold within a period of 3 years from its purchase, there would be an additional tax impact to your father in respect of any LTCG claimed exempt previously.

I have been working in an organization for 2 years and am now serving a 3-month notice period. I want to withdraw my provident fund (PF) money as I am joining my family business. How much money can I withdraw, and is there any tax deducted at source (TDS) on the withdrawn amount?

—Prahul Jain

We presume this is your first job (i.e. you have not contributed to a PF previously) and that you are an Indian citizen.

Under the Indian PF law (the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952), you can withdraw your PF balance only if you are not employed with another employer, to whom the PF law applies, for at least 2 months after you leave your current job. Therefore, presuming you are not required to contribute to PF while you are associated in your family business as a non-employee, you can seek withdrawal of your balances from the PF office after at least 2 months of your leaving the current job. The total amount in your PF account—your contribution, employer’s contribution and the interest thereon—can be withdrawn.

PF withdrawal will trigger a tax liability in your hands, unless you have rendered continuous services for a cumulative period of at least 5 years with your current and/or previous employers. And, for this purpose, the period of service will only be considered if the PF balance maintained with the previous employer was transferred to the PF account of your current employer.

In this case, there would be a tax implication on the withdrawal. It will be payable at specified rates on the employers’ contribution, your contribution (to the extent of deduction claimed in prior financial years under Section 80C of the Income-tax Act, 1961) and interest on total contributions.

If your current employer does not maintain an in-house PF Trust, taxes would be deducted at source at the rate of 10% of the amount withdrawn, unless the amount withdrawn is less than Rs50,000. A higher rate of tax would be applicable if you do not provide your PAN. Depending on your actual liability on such withdrawal and your other income, you may need to pay differential tax (with interest as applicable) or claim a refund. Also, you may have to file a return and disclose this amount.

Parizad Sirwalla is partner (tax), KPMG.

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