Capital Gains Tax on Sale of Agricultural Land: Rules, Exemptions, and Savings in 2025

Agricultural land is a crucial part of India’s economy, providing employment and food for the nation. If you’re considering selling your agricultural land, it’s important to understand the concept of capital gains on the sale of agricultural land. This refers to the profit earned from selling land, and tax implications differ depending on whether the land is in rural or non-rural areas. Knowing these tax laws will help you manage capital gains effectively.

What Are the Basics of Agricultural Land?

There are two categories of agricultural land:

Rural Agricultural Land:

• Located within a municipality with a population of fewer than 10,000.
• Located outside the municipality and meets the following criteria:
  • Situated over 2 km away from the municipality's local limits with a population of more than 10,000 but not exceeding 1,00,000.
  • Situated over 6 km away from the municipality's local limits with a population of more than 1,00,000 but not exceeding 10,00,000.
  • Situated over 8 km away from the municipality's local limits with a population exceeding 10,00,000.

Urban Agricultural Land:

Any agricultural land that does not meet the conditions specified for rural agricultural land.

How Is the Sale of Agricultural Land Taxable?

In India, the taxability of the sale of agricultural land depends on the nature of the land and the purpose of holding it. Here's what you need to know:

Tax on Sale of Rural Agricultural Land 

 If you hold rural agricultural land, it does not qualify as a capital asset. Therefore, no capital gains or losses arise on the transfer or sale of rural agricultural land.

Urban Agricultural Land

• If you hold urban agricultural land, it qualifies as a capital asset, and capital gains arise on its sale or transfer. 
• The nature of capital gains, whether long-term or short-term, will depend on the holding period of the asset.
•  If you hold the land for more than 2 years, it will be considered a long-term capital gain and taxable at 20%.
•  If the holding period is less than 2 years, the gain will be a short-term capital gain and taxable at the slab rate.

Holding Agricultural Land as Stock-in-Trade

If you regularly buy and sell agricultural land in the course of your business, holding it as stock-in-trade, then gains from the sale of such land are taxable under the head Business & Profession. In such cases, no capital gains will be chargeable on the agricultural land.

What Are Capital Gain Exemptions on Sale of Agricultural Land Under Section 54B?

When selling agricultural land in a rural area, no capital gains tax applies as it isn't considered a capital asset. However, in non-rural areas, a common question arises: under which section can exemption be claimed for the sale of agricultural land? In non-rural areas, capital gains tax is applicable, but exemption can be sought under Section 54B of the Income Tax Act, 1961 if the following conditions are met:

• Only individuals or Hindu Undivided Families (HUFs) can claim the exemption.
• The land being sold must be agricultural land, whether it’s a long-term or short-term capital asset.
• The individual or their parents must have used the land for agricultural purposes for at least two years before the sale. For HUF, any member can use the land.
• The taxpayer must purchase another agricultural land within two years of selling the old one. If not, the capital gains amount should be deposited in the Capital Gains Account Scheme and withdrawn when purchasing the new land.
• If the new land is sold within three years of purchase, the tax exemption will be withdrawn, and the taxpayer will have to pay tax on the exemption claimed earlier.

Individuals and Hindu Undivided Families (HUFs) are eligible for exemption under Section 54B of the Income Tax Act, while companies, LLPs, and firms are not. The exemption amount is determined based on the lower cost of the new agricultural land or the capital gains from the sale of the old agricultural land. This exemption applies to both long-term and short-term capital gains, and it is applicable even if the new agricultural land is purchased in the name of another person, such as a spouse or child. Furthermore, the exemption remains valid even if the new agricultural land is acquired in a different state or in the same urban area where the old agricultural land was located. For precise calculations of the exemption amount, it is advisable to consult with a tax advisor who can consider individual circumstances.

Is Long-Term Capital Gain Tax Applicable on the Sale of Agricultural Land?

As per the Income Tax Act, the applicability of long-term capital gain tax on agricultural land depends on whether it qualifies as rural or urban agricultural land.

Rural Agricultural Land:

The sale of rural agricultural land is exempt under Section 10 of the Income Tax Act. This means no sale of agricultural land capital gain tax is applicable on the profit from the sale of rural farmland, provided it meets the criteria specified under the definition of rural agricultural land as per income tax.

To determine what is rural agricultural land, the property must:

• Be located in an area with a population under 10,000.
• Be situated a certain distance from the nearest municipality (depending on population limits).

For further details, refer to this definition of rural agricultural land as per income tax.

Urban Agricultural Land:

The sale of agricultural land in urban areas is treated differently. Since urban agricultural land does not qualify as rural agricultural land, it attracts income tax on the sale of agricultural land, including long-term or short-term capital gains tax, based on the holding period.

How Is Capital Gain on Sale of Agricultural Land in Urban Areas Calculated?

The capital gain on the sale of agricultural land in urban areas is taxable under the Income Tax Act. To calculate the tax liability:

• Identify if the sale results in a short-term or long-term capital gain.
• Compute the capital gain on the sale of agricultural land by subtracting the indexed cost of acquisition and improvement from the sale price.

Tax Applicability:

• Short-Term Capital Gains: If the land is held for less than 24 months, the gain is taxable at the applicable income tax slab rates. Learn more about short-term capital gains tax.
• Long-Term Capital Gains: If held for over 24 months, the profit attracts a 20% long-term capital gain tax on agricultural land with indexation benefits.

Exemptions and Savings:

Certain exemptions can be claimed to save Tax on the profit on the sale of agricultural land, including investing the capital gain under the Capital Gain Account Scheme or buying another agricultural land. For details, refer to this guide on saving capital gains tax.

Factors to Consider:

• The rural agricultural land definition as per income tax is crucial in determining if the sale of rural agricultural land is exempt under Section 10.
• Tax is inevitable if the land falls under urban agricultural land unless specific exemptions are utilised.

Understanding what is rural agricultural land and how to identify rural agricultural land is essential to calculate the tax liability. Use these guidelines and leverage applicable exemptions to minimise the tax impact.

What Is Section 10(37) of the Income Tax Act, 1961?

• Section 10(37) of the Income Tax Act, 1961 provides an exemption from capital gain tax on agricultural land on compensation received for compulsory acquisition of urban agricultural land, subject to the following conditions:
• The exemption is available only to individuals or HUF.
• It is applicable to capital gains arising from the transfer of agricultural land.
• The agricultural land must be situated within the jurisdiction of a municipality, municipal corporation, notified area committee or town area committee or within a certain distance from these limits.
• The land must have been used for agricultural purposes for at least two years by an individual, their parents, or HUF.
• The transfer must be due to compulsory acquisition under any law or the transfer consideration must be approved by the Central Government or Reserve Bank of India.
• The compensation received must be after 1st April 2004.

Population Limit	Distance Limit from Local Limits of Municipality
More than 10,000 but not exceeding 1 Lakh	Up to 2 km
More than 1 Lakh but not exceeding 10 Lakhs	Up to 6 km
More than 10 Lakhs	Up to 8 km

How Do You Disclose Sale of Agricultural Land in ITR?

Agricultural land used for farming may not necessarily be considered as such for income tax purposes. Only agricultural land situated outside city or town limits, based on population and distance, qualifies as agricultural land for taxation purposes. If your agricultural land meets the definition of agricultural land as per income tax laws, it is not treated as a capital asset for taxation purposes. 

Therefore, profits from the sale or transfer of this land do not count as income for tax purposes and do not need to be disclosed in the income tax return. Agricultural income, on the other hand, is considered an exempt income and must be disclosed in the income tax return to calculate the average tax rate. Profits made from the sale of agricultural land that is not a capital asset do not need to be disclosed in the income tax return.

What Is the Income Tax on Sale of Ancestral Agricultural Land?

If you and your co-owners decide to sell your inherited land and make a profit, you will have to pay capital gains tax on the amount earned. The tax amount will be calculated based on the selling price or the stamp value, whichever is higher. The cost of acquisition will be determined based on the original purchase price or the fair market value of the land in 2001, whichever is greater.

To calculate the indexed cost of acquisition, you will need to multiply the cost of acquisition with the cost-inflation index for the year of sale. For example, if you sell the land in 2025, you would need to use the cost-inflation index for that year to calculate the indexed cost of acquisition.

The difference between the selling price and the indexed cost will be considered your long-term capital gain and will be taxed at a flat rate of 20%. However, you can potentially avoid paying this tax by investing the gains in a new house or bonds issued by NHAI or RECL, as outlined in Section 54F and Section 54EC of the tax code.

Is TDS Applicable on the Sale of Agricultural Land?

Individuals are required to deduct a TDS rate of 1% on the sale/purchase of real estate property transactions if the transaction value exceeds 50 Lakhs. 

However, it is essential to note that the TDS rate mentioned in Section 194IA is not valid for agricultural land sale/purchase transactions. Even if the value of the agricultural land sale/purchase transaction is more than Rs. 50 Lakhs, TDS on Property will not be applicable. 

It is advisable to seek guidance from a tax expert or chartered accountant to ensure adherence to all relevant tax laws and regulations.

Is TDS Applicable on the Sale of Agricultural Land Valued Above ₹50 Lakhs?

The tax on the sale of agricultural land in India, particularly when valued above ₹50 lakhs, raises questions about the applicability of Tax Deducted at Source (TDS). In India, TDS under Section 194-IA of the Income Tax Act applies to the sale of immovable properties exceeding ₹50 lakhs. However, the sale of rural agricultural land is exempt under Section 10 of the Income Tax Act.

Applicability of TDS on Agricultural Land

• The transaction is not subject to TDS if the land is classified as rural agricultural land as per income tax laws. Rural agricultural land falls outside the definition of a capital asset, thereby exempting it from capital gains tax and related TDS provisions.
• For urban agricultural land, which is not exempt under Section 10, TDS may be applicable if the sale value exceeds ₹50 lakhs. The seller will also need to evaluate their liability for capital gains on the sale of agricultural land based on the profit earned from the transaction.

What Is Rural Agricultural Land as per Income Tax Law?

Understanding the definition of rural agricultural land is essential for determining tax exemption on sale of agricultural land and liabilities under the Income Tax Act. Land's classification as rural or urban depends on its geographical location and proximity to specified areas.

Rural Agricultural Land Definition as per Income Tax

As per the Income Tax Act, rural agricultural land refers to land that is:

• Situated outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and
• Located at a distance:
  • Beyond 2 kilometres from a municipality with a population between 10,000 and 1,00,000.
  • Beyond 6 kilometres from a municipality with a population between 1,00,000 and 10,00,000.
  • Beyond 8 kilometres from a city with a population above 10,00,000.

The sale of rural agricultural land is exempt under Section 10, which means there is no agriculture land sale income tax if it qualifies as rural farming land. Factors such as location, distance from municipal limits, and usage must be evaluated to classify land as rural agricultural land. This distinction is significant since capital gains on the sale of agricultural land differ based on whether the land is rural or urban.

How to Define Rural Agricultural Land for Tax Purposes?

With a large percentage of the population working in agriculture, India has a mostly agrarian economy. Crops like wheat, rice, legumes, and vegetables are the main crops grown on rural agricultural land. Agricultural lands in rural areas are subject to different regulations. Agricultural Land in Rural Areas are situated outside of cities with particular population densities and separations.

The sale of rural agricultural land is exempt under section 10 since it is not regarded as a capital asset under the Income Tax Act. Gains from rural agricultural land are not subject to taxes since, according to the Income-tax Act, it is not a capital asset. Income from agricultural land must be reported in Schedule EI of the ITR and is exempt under Section 10(1).

If it's outside the boundaries of the municipality, it must be at least:

• More than 10,000 people, but fewer than one million, live more than two kilometers outside the municipality limits.
• More than one million people, but fewer than ten million, live more than six kilometers outside the municipality limits.
• With a population of over 10,000, the municipality is more than eight kilometers away.

For the land to be classified as rural agricultural, the appropriate legal documents, including land ownership records, must be in place. This guarantees genuineness and openness in real estate deals.

Sale of Rural Agricultural Land Exempt Under Section 10

The sale of rural agricultural land is exempt under section 10(1) of the Income Tax Act, provided requisite conditions are accomplished. This exemption promotes agricultural practices and saves rural farmers from economic tax deficits on land transactions.

No capital gains tax is charged when rural agricultural land is transferred and sold, which is an excellent advantage for those dealing with these properties. The exemption applies irrespective of whether the sale leads to a short-term or long-term capital gain as long as the land qualifies as "rural agricultural land" per the Act. You can check the Capital Gain Account Scheme to understand the nuances better.

What is Rural Agricultural Land as per Income Tax?

The Income Tax Act under Section 2(14)(iii) defines rural agricultural land as income tax. The land must satisfy these conditions:

• Location:
  • The land must be located outside municipal limits or within certain limits of small towns as defined by population criteria.
  • Specifically, if the land is situated beyond 8 km from municipal or cantonment board limits and falls under a population below 10,000, it qualifies as rural.
• Use:
  • The land should primarily be used for agricultural purposes like cultivation, farming, or allied activities.

This classification helps identify which agricultural lands qualify for tax exemptions. Proper documentation and land records are essential for determining eligibility. For an in-depth guide on identifying rural agricultural land, learn about Capital Gain on the Sale of Property.

Who Can Claim Exemption on Sale of Agricultural Land Under Section 54B?

Individuals and Hindu Undivided Families (HUFs) are eligible to claim the exemption under Section 54B of the Income Tax Act. However, companies, LLPs, and firms are not eligible for this exemption. Here are the conditions for claiming the exemption:

• The sold agricultural land must have been used for agricultural purposes by the individual or HUF for at least two years prior to the sale.
• The new agricultural land must be used for agricultural purposes.
• The new agricultural land must be purchased within two years from the sale of the old agricultural land.
• The exemption is limited to the lower of the capital gains from the sale or the cost of the new agricultural land.

What Amount of Exemption Is Available Under Section 54B?

The amount of exemption under Section 54B of the Income Tax Act is determined by the lower cost of the new agricultural land or the capital gains on the sale of the old agricultural land. Here are some additional pointers regarding the amount of exemption:

• The exemption is available for both long-term and short-term capital gains.
• The exemption is available even if the new agricultural land is purchased in the name of another person, such as a spouse or child.
• The exemption is available even if the new agricultural land is purchased in a different state or in the same urban area where the old agricultural land was located.
• It is important to consult a tax advisor to determine the exact amount of exemption based on individual circumstances.

How Can NoBroker Assist in the Process?

To summarise, if agricultural land is located in an urban area, it would be considered a capital asset and subject to capital gains tax upon its sale. Understanding the tax implications of selling agricultural land in an urban area is crucial to ensure compliance with tax laws and regulations and to maximise profits. 
NoBroker’s Real Estate Experts can assist you in understanding the legal obligations and procedures involved in real estate transactions. If you require consultation, leave a comment below the article, and one of our representatives will promptly get in touch with you to provide guidance and assistance.

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