What is the tax liability on sale of farm land?
2 min read 23 Apr 2023, 10:25 PM ISTFor the purpose of calculation of LTCG, the cost and the indexed cost of acquisition can be considered as per the applicable provisions
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I am a 33-year-old salaried professional who wants to sell my ancestral agricultural land located in a rural area.
How should I transact with the buyer considering that I want to deposit the entire amount in my bank and reinvest thereafter? The registry document, however, will be based on the circle rate of the property, while the actual transaction will be done at the market rate, which is three times that of the circle rate. Since I am already in the 30% tax slab, what will be the tax liability on this transaction?
—Toshi
Agricultural land in India does not qualify as a capital asset, unless it is situated in:
Any area within the jurisdiction of a municipality/ cantonment board, with a population of 10,000 or more; or any area (distance measured aerially) within 2 km of the local limits of any municipality/ cantonment board with a population of more than 10,000 but within 100,000; or within 6km of the local limits of any municipality/ cantonment board with a population of more than 100,000 but within 1 million; or within 8km of the local limits of any municipality/ cantonment board with a population of more than 1 million.
’Population’ for this purpose is defined as the number of people according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
In case the land referred in your query meets the specifications above, such agricultural land in India will not qualify to be a capital asset and hence gain/ loss from transfer of such land shall not be taxable under the income tax Act.
However, in case the land does not meet the above specifications, it will qualify as a capital asset and any gain or loss from transfer of such land will be subject to capital gains tax under Section 45 of the Act.
Assuming that the land has been held for more than two years (including the holding period of previous owner from whom this property was inherited), the gain would be classified as long-term capital gains (LTCG).
For the purpose of calculation of LTCG, the cost and the indexed cost of acquisition can be considered as per the applicable provisions. Further, as the actual transaction value (i.e. the market rate) is higher, the same should be considered as the sale consideration for calculating LTCG (and not the lower circle rate).
The LTCG will be subject to a tax rate of 20% plus applicable surcharge and cess. The roll-over deductions under Section 54B, 54F and 54EC of the Income Tax Act towards reinvestment in specified assets can be evaluated against the LTCG, subject to the specified conditions.
In relation to the mode of receipt of money, please note that provisions of section 269SS of the Act prohibit receipt of any sum of money in excess of ₹20,000 in cash. Any transaction above this amount should be in non-cash modes (account payee cheque/account payee bank draft/ use of electronic clearing system through a bank account/ prescribed electronic modes), in relation to transfer of immovable property.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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