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Maximize Capital Gain on Sale of Agricultural Land



capital gain on sale of agriculture land


Investing in agricultural land can be the best investment step, but make sure you understand how to maximize capital gain on selling that land, as it is very important for increasing your return on investment. Capital gain refers to the profit made from selling land at a higher price than its purchase cost.

 

In this article, you will learn how to maximize capital gain on the sale of agricultural land and the tax implications associated with both urban and rural areas. 


During the sale of agricultural land, tax implications depend on whether you own rural land or urban land, and the difference between the sale price and the original purchase price will determine the capital gain of your land. 


Capital Gain on Agricultural Land in Rural Areas 

In India, rural agricultural land is not subject to capital gains tax, but the land must meet some conditions to fall under this category. The land must be located outside the jurisdiction of the municipality board with a population under 10,000 and a specified distance away from such areas.


This exclusion is advantageous for investors, as it allows them to retain the entire profit from the sale without any tax deductions. It is a desirable investment option because you can invest in agricultural land situated beyond specific distances from urban limits, and it does not attract capital gains tax. 


Capital Gain on Agricultural Land in Urban Areas

Urban agricultural land is subject to capital gains tax, unlike rural land. The tax is directly proportional to the duration of ownership.


If the land is held for more than two years, the profit is considered a long-term capital gain (LTCG) and will be taxed at 20% after indexation benefits. If the land is held for less than two years, it will be classified as a short-term capital gain (STCG) and taxed according to the owner’s income tax slab rates. 


Tax on the Sale of Agricultural Land

Understanding Tax Implications

The tax on the sale of agricultural land varies depending on whether the land is rural or urban. Here’s a brief overview:


The tax on the sale of agricultural land is different for rural and urban category 

  • Rural agricultural land: It is exempt from capital gains tax if some specific criteria, such as being classified as rural and having a population less than 2000/square km, are fulfilled regarding location and population.

  • Urban Agricultural Land: This land category is subject to capital gains tax, where the tax rate depends on the duration of land ownership (short-term or long-term). 

Legal Definitions and Sections

Capital Assets (Section 2(14))

The Income Tax Act, 1961 defines "Capital Asset" under Section 2(14) as property of any kind held by an assessee, whether connected with business or not, but does not include: 

  • Stock in trade 

  • Personal effects, such as movable property held for personal use, jewellery, drawings, antiques, paintings and any other work of art, are excluded. 

  • Excluding the land situated within specified limits of a municipality board with a population of more than 10,000, other than any agricultural land in India. 


Capital Gain (Section 45(1))

According to Section 45(1), any profits or gains arising from the transfer of a capital asset during the previous year are subject to capital gains tax.

Conditions And Exceptions (section 54B) 

  • The agricultural land for sale must be used by the owner or their parents for a minimum of two years for agricultural purposes before being handed over to the other party. 

  • Within two years of the sale, the capital gain is reinvested in new agricultural land. 

  • The exemption will be revoked if the new land is sold within three years, and the gain will be considered short-term. 

  • The capital gain will be deposited in the Capital Gain Account Scheme until the new land is bought. 

Maximizing the Capital Gain on the Sale of Agricultural Land 

The following categories can be followed to maximize capital gains:

1. Proper Valuation

It is very important to accurately valuing your property. The process of doing everything properly includes a comprehensive assessment of the land’s market value, where soil quality, water availability, and potential for future developments are the considerations to identify the best. Taking the help of a professional appraiser will make it easy for you to set a competitive yet profitable price. 


2. Tax Planning

Choosing a tax professional will be a great decision, as he will help you navigate the complexities of tax laws and identify available exemptions or deductions. You will get a better understanding of many schemes, including the Capital Gains Account Scheme (CGAS), which will help you distinguish capital gains tax by reinvesting in specified bonds or agricultural properties. 


3. Improving Land Value

Always put your money into something fruitful. Investing in sustainable farming practices and infrastructure improvements will significantly boost your land’s value. The sustainable practices are soil enrichment, irrigation system upgrades, and planting high-value crops. Whereas, infrastructure enhancement including access roads, storage facilities, and fencing, can also improve the functional value of the property. 

4. Strategic Selling

Time is your important tool. The agricultural market is highly influenced by market trends, crop cycles, and economic conditions. Higher returns are highly possible during peak periods when demand for agricultural produce is rising. A real estate agent would be a great choice to opt for, as he can give valuable insights into the best times to sell.




Conclusion

It requires a thorough understanding of tax implications and strategies to maximize your capital gain on the sale of agricultural land. When dealing with rural or urban land, you need to do proper valuation, tax planning, and strategic selling.


Swasya Living’s Sannidhi Farmlands will provide you with substantial and sustainable returns along with full guidance throughout your journey. Invest with Swasya Living and transform your agricultural investment into a profitable and rewarding venture.








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