Sold agricultural land in your hometown? Check if you must pay capital gains tax on the sale

If you recently sold agricultural land in your hometown, you may be wondering whether the money you received from the sale will be subjected to capital gains tax. The answer depends on factors such as where the parcel of land is located and whether it qualifies as a capital asset.

Even when no capital gains tax is payable, you are still required to report the transaction while filing your income tax return ( ITR ) for the relevant financial year when the sale happened. Both taxable and tax-free agricultural land sales are reported under different heads of the ITR form.

No, the sale of rural agricultural land is exempt from capital gains tax, meaning if the said agricultural land is located in a village or rural area, then you won't have to pay any tax on the sale proceeds.

Under Section 2(14)(iii) of the Income Tax Act, 1961, rural agricultural land is not treated as a capital asset, making it tax-free.

Any property that does not qualify as rural agricultural land will be considered urban agricultural land, which is when capital gains tax becomes applicable. Let's say, you sold your parcel of land which is located in a city, in such cases you would have to pay tax on the sale proceeds.

Under the Income-tax Act, urban agricultural land is considered a capital asset and the tax treatment depends on how long the land was held before it was sold:

An agricultural land situated beyond the jurisdiction of a municipality or cantonment board having a population of 10,000 or more is not treated as capital asset if it does not fall within following distances (to be measured aerially):

If the agricultural land does not satisfy these conditions, it is treated as urban agricultural land and taxed accordingly, according to information available on the income tax department's website.

In India, inherited property is not taxed at the time of inheritance . However, if the legal heir decides to sell the urban agricultural land later, then they would have to pay tax. Like we discussed above, it does not apply to rural agricultural land sale.

In respect of assets that are inherited or received as gifts without consideration, the cost to compute capital gains is taken as the cost incurred by the previous owners who actually acquired them for consideration.

Likewise, the period for which such property was held by all the previous owners, beginning with the person who had acquired it for consideration, shall be included in the holding period to determine the applicable tax.

Since rural agricultural land is not a capital asset , any income arising from such land needs to be disclosed in Schedule EI (Exempt Income) of the income tax return in the relevant financial year.

Urban agricultural land, on the other hand, is treated as capital asset, and the sale of such assets needs to be disclosed in Schedule CG (capital gains) in ITR.

In non-audit cases, and where taxpayers don't have business income, they can file ITR-2 to report income from the sale of agricultural land. For those with business or professional income, ITR-3 can be filed instead (if you did not choose presumptive taxation scheme).