Your questions – Income tax: pay tax on the proceeds from the sale of farmland if it is considered capital property

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For computing purposes, real estate is classified as long-term fixed assets if it is held for more than 24 months, otherwise it is treated as short-term.

By Chirag Nangia

I intend to sell agricultural land in my native region. Please tell me:
a) Where should it be included in the ITR (under which section)?
b) Is an exemption available under the Income Tax Act?
c) Tax rates for the sale of agricultural land for the fiscal year 2021-22.

(a) For income tax purposes, agricultural land outside the specified boundaries is not classed as fixed assets and therefore its transfer does not incur any capital gains tax. Relevantly, land in India should be classified as agricultural land:

(1) If it is located in an area under the jurisdiction of a municipality and its population is less than 10,000, or

(2) If situated outside the boundaries of the municipality, then situated at a measured distance (i) of more than two kilometers from the local boundaries of the municipality and which has a population of more than 10,000 but n not exceeding 1,00,000; or (ii) more than six kilometers from the local boundaries of the municipality and which has a population of more than 1,00,000 but not exceeding 10,00,000; or (iii) more than eight kilometers from the local boundaries of the municipality and which has a population of more than 10,000,000. If your agricultural property meets the above criteria, there will be no capital gains and therefore no disclosure is required in the ITR. However, if it qualifies as a capital asset, you must disclose the consideration for the sale, the indexed acquisition cost, and the resulting capital gain on Schedule CG of Form ITR.

(b) To calculate capital gains, deduct the cost of acquisition, cost of improvement and expenses from the proceeds of sale. Section 54F allows tax exemption if the LTCG on the sale of property (other than residential property) is reinvested in residential property. The new residential property must be purchased within one year before or two years from the date of transfer. In the case of construction, the period is three years. Section 54EC allows tax exemption if LTCG is invested in RECL/NHAI bonds, within six months of the transfer. The total investment in the year and the following year can reach Rs50 lakh.

(c) For computing purposes, real estate is classified as long-term fixed assets if held for more than 24 months, otherwise it is treated as short-term. While STCG is taxed at the applicable slab rates for an individual taxpayer, LTCG is taxed at a flat rate of 20% with indexation (plus applicable surcharge and tax).

(The author is the director, Nangia Andersen India. Send your questions to [email protected])

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