How to save Income Tax on Selling Urban Agricultural Land; Know Here

If you made a Long Term Capital Gain (LTCG) by selling an ancestral urban agriculture land. How you can save taxes on long-term capital gains? Let’s know in this article.

In the case of the sale of agricultural land capital gain, which is taxable since it is not farmland and is not classified as a capital asset for tax reasons, a person or HUF has three options for claiming exemption from paying taxes on LTCG. Such land is commonly known as urban agricultural land.

Exemption of Section 10(37)

The exemption that can be claimed on the Sale of Urban Agricultural Land –

Capital gains on compensation received for the compulsory acquisition of urban agricultural land are tax-exempt under Section 10(37) of the Income Tax Act. You can disclose it on Schedule EI of your income tax return.

Condition to claim exemption u/s 10(37):

• Land should be urban agricultural land.
• Such land should have been used for agricultural operations in the two years preceding the transfer.

Exemption of Section 54B

Section 54B of the Income Tax Act allows for a capital gains tax exemption on agricultural land located in an urban area. The following conditions should be fulfilled:

• The exemption is available to an Individual or a HUF.
• The land being sold must have been used for agricultural purposes by the individual, his parents, or the HUF for two years immediately preceding the date of transfer.
• Another agricultural land should be obtained within two years following the transfer of this land.
• The new agricultural land purchased to claim the capital gains exemption should not be sold within three years of purchase.
• If you are unable to purchase agricultural land before the date of filing your Income Tax Return, the amount of capital gains must be deposited in a deposit account at any branch (except the rural branch) of a public sector bank in accordance with the Capital Gains Account Scheme, 1988. The exemption can be claimed for the amount deposited.
• If the cash deposited under the Capital Gains Account Scheme was not utilized to purchase agricultural property, it will be considered as a capital gain in the year in which two years from the date of the sale of land expires. Of course, in this situation, you can withdraw these funds for whichever purpose you wish.

Exemption of Section 54EC

Another exemption is of Section 54EC, you can take advantage of the Section 54EC exemption by investing in the indexed LTCG for the purchase of capital gain bonds from certain financial institutions such as NHAI, REC, RFC, and PFC within six months of the sale of urban agricultural land.

Conclusion

Urban agricultural land is a capital asset, and the sale of such assets must be stated in Schedule CG of the ITR. You can deduct the Indexed Cost of Acquisition and Improvement from the sale value. You can also claim exemption under sections 54B, 54EC, and 54F for the sale of urban agricultural land.