Tax benefits of buying agricultural land in India

What are the Tax benefits of buying agricultural land in India

Let’s begin by understanding the meaning of agricultural land. Any land that you buy and may dedicate to agricultural activities like farming of crops, horticulture or livestock rearing is agricultural land. You cannot use agricultural land for residential purposes or for other commercial use.

Agricultural land in India is divided into two types:

Rural agricultural land- If the land is situated in any area within the jurisdiction of a municipality and its population is less than 10,000. If it is located outside the municipality limit, then it would be qualified under rural category after calculating the distance and population of the area from the location of the municipality. If your land qualifies these two conditions, then it will be a rural agricultural land.

Urban agricultural land- As the name implies, a plot is categorized as an urban agricultural plot when it is not located in a rural area but in a specific place in urban areas.

Buying an agricultural land has certain tax benefits in India about which we would explain the next content.

Are there any tax benefits on buying agricultural land in India

Tax benefits on rural agricultural land

Owing an agricultural land has certain advantages. When you earn a certain value of money from using the land for agricultural purposes or you gain an income from selling the land, you are exempted from paying tax.  But remember this is applicable to agricultural land in rural areas, where it is not considered a capital asset.

However, the rules regarding owning an agricultural land vary from state to state. In some states, agricultural land can arbitrarily be brought by farmers while in other states, a common man can also purchase agricultural land.

Also, note that TDS is not deducted if the property purchased is agricultural land

Tax benefits on urban agricultural land

This type of agricultural land is considered as a capital asset. Any gain arising from the sale will be treated as capital Gain.

The capital gain could be long term or short term depending upon the time period of holding of the asset by the individual person.

If the period of holding is more than two years then the capital gain arising will be termed as long term capital gain. If the holding period is shorter, then the gain arising is termed as short term capital gain. Long term capital gain is taxable at 20% whereas short term capital gain is chargeable at a predetermined slab rate by income tax of India.

The difference is when you buy a home or a non-agricultural residential plot you have to pay property tax on that.

Tax benefit on compulsory acquisition of urban agricultural land

According to Section 10(37) of the Income Tax Act, 1961, any capital gain from the compulsory acquisition of such land shall be exempted. To claim tax exemption from capital gains, the following criterion needs to be fulfilled

Conditions to be satisfied for claiming exemption from Capital Gains under section 10(37) and The Right to Fair Compensation and Transparency in Land Acquisition Act are:

1. Such land should be an Urban Agricultural Land.

2. Such land, during the period of two years immediately preceding the date of transfer, was being used for agricultural purposes by HUF or individual or his parent.

3. Such transfer is by way of compulsory acquisition under any law, or a transfer the consideration for which is determined or approved by the Central Government or the Reserve Bank of India.

4. Such income has arisen from the compensation or consideration for such transfer received by such assessee on or after the 1st day of April 2004.

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