Q: I own agriculture land which I inherited after the death of my father. He had purchased the land in 1970s for Rs 1,500. Now I am planning to sell the land for investing in business. I need your advice on the taxability of such sale so as to avoid any tax on such sale.
Shriram Via mail
A) As per Section 2(14) of the Income-Tax Act, the term capital asset does not include agriculture land in India. However, the following agricultural lands are considered as capital asset:
(a) Agriculture land situated within the jurisdiction of municipality or cantonment board and having population of 10,000 or more, or, (b) In any area within the distance, measured aerially:
(i) being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding one lakh; or (ii) being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding 10 lakh; or (iii) being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10 lakhs.
If the agricultural land satisfies the criteria of being capital asset, then gains arising on the sale of such land will be taxable at rate of 20 per cent (plus surcharge, if applicable and education cess).
Further, you will be eligible to substitute the value of the land as on April 1, 2001, based on the valuation rate adopted by the registering authorities. You will also be able to take the benefit of cost of inflation index on the value determined as on April 1, 2001.
According to Section 54B where the capital gain arises from the transfer of agricultural land which was used by the assessee being an individual or his parent, or a HUF for agricultural purposes for a period of two years immediately preceding the date of transfer, the capital gain arising as a result of transfer or sale of such agricultural land is not to be charged provided that the capital gains has been utilised for the purpose of purchase of any other land being used for agricultural purposes within a period of two years from the date of transfer or sale Where the amount of capital gain is not utilised for acquisition of the new agriculture land before the due date of furnishing the return of income, to the extent of unutilised capital gains it should be deposited by the assessee in an account with any specified bank or institution in Capital Gains Accounts Scheme.
Another option to avoid the capital gains tax liability is by investing the long-term capital gains in capital gain bonds specified under Section 54EC, within 6 months from the date of transfer/sale , subject to maximum of Rs 50 Lakhs redeemable after five years from the date of transfer.
However, if the agriculture land is outside the purview of the definition of capital asset, you will not be liable to pay any income-tax on the sale of such land.
(The write is a Hyderabad-based CA. Please send your to info@rathiandmalani.com)
