Capital Gain Exemption on Sale of Agricultural land


I have sold our ancestral agricultural land in Punjab recently.

  1. We have been told that it is within 8 Kms of municipal limits and hence categorised as urban land, which is taxable for the purpose of CG (rural land is tax free).
  2. Further research indicated that proceeds from agricultural land may either be re-invested in purchase of another agricultural land or a residential property in order to be eligible for Capital gain rebate under income tax.
  3. Investment in Commercial property is not eligible for any rebate.
  4. Also, if I buy residential property will I get the benefit of cost indexing as I will get if I re-invest in agricultural land?
  5. I do not intend to purchase another agricultural land, therefore, the only option left for me in to buy residential land. BUT, now I find out that since I already own a residential property in India, I cannot claim capital gain rebate on that new property I may be planning to buy. Is CG rebate not eligible on the second residential property. I learned that there was an amendment to this section sometime back and second house is eligible.
  6. how can I get the benefit of the CG rebates aside putting money in capital bonds for 3 years?
G walia

Dear G

You have studied a Lot on this subject and most of your Information is correct but some of it is not correct.

Agriculture Land: agriculture land in rural area is not covered in definition of Capital asset hence no capital gain is applicable in case of sale of agriculture land in rural area .However capital gain tax is applicable if land is situated in urban area.

Investment in Agriculture Land:yes you are correct that reinvestment in agriculture land can save tax on capital gain but there are some conditions to it ,as given in section 54 B of the income Tax act,But as you have given you are not Interested in it we are not going to these details .further It is true that

Investment in commercial property will not give you any exemption /deduction from capital gain.

Investment In Residential property : with Investment in residential property you can save tax u/s 54 F .But not same as agriculture land can .the difference between both the option are that in case of section 54 B (Investment in agriculture land) the amount to be invested only the amount of capital gain but in case section 54 F (investment in new residential house) net sale proceed is to be invested in the new Residential house.

Purchase of residential house: Purchase of residential house option is left with you ,because as section this option can be opted if
    -there is long term capital gain.
    -gain should be from sale of asset other than residential house.

You are fulfilling both the condition as you have sold ancestral agriculture land which is long term non residential house property.

Now the question is that whether you can save tax even if you have a other house on date of transfer of agriculture land ?

The News is good ,you can invest in residential property and can save tax on long term capital gain tax on sale of agriculture land even you already have a residential property with you.Means if you have a house already with you even then you can save tax under section 54 F .

Capital gain calculation : To calculate Holding period for the purpose of capital gain ,the period of holding of your father ,grand father ,.........will also be included means it is LONG term property.But the Cost of indexation will be available to you only from when it is being transferred to you.Cost of land of previous owner will be taken and if purchased before 01.01.1981 then cost price or market value as on 1.4.1981 which ever is higher will be cost of that land . On this cost ,Indexation will be given .

Amount of Investment : U/s 54 F ,the net receipt from the sale of Land in the question has to be invested in a residential house property by
  • Purchase of new house before one year and with in two years from the transfer of above Land .
  • Construction of new house with 3 years from date of transfer.

if amount invested in house is less then net receipt from land then exemption will be available on pro-rata basis.

Capital gain scheme:If amount of capital gain arising from the sale of old asset(land here)is not used as per point above before the due date of furnishing of income tax return or furnishing of return which ever is earlier than the balance unused amount should be deposited in designated banks under capital gain account scheme 1988 .

if capital gain amount unused has not been deposited under the scheme then the amount of capital gain will be taxable in the previous year as long term capital gain it self no matter it is actually used by the assessee for the purpose with the period explained above .

if the amount deposited in capital gain scheme , wholly or partly has not been used with in the three year from the date of transfer of old asset and purpose given above then the unused amount will be taxable in the hand of the assessee in the previous year in which three years expires from date of transfer of old asset as long term capital gain.

Exemption withdrawal : after availing above exemption ,
  • if new house will be sold with in 3 years from purchase/construction of the house or
  • if you purchases another house other then new house with 2 year from transfer of old house or construct another house with in 3 years from date of transfer of old house
then amount exempted on purchase of new residential House will Be taxable in your hand as Long term capital gain in year in which above any of the above two happens.

Exemption through Investment in Bonds : You are also eligible to save tax u/s 54EC by investing in Bonds .Unlike residential House u/s 54 F ,In bonds Only capital gain amount is required to be invested.No need to invest net receipt.suppose yo have sold land at Rs 100/- and capital gain after indexation is 45 then in case of section 54F (residential House) you have to invest 100 where as in Bonds only 45 is required to be deposited to claim full capital gain tax exemption.Lock in period is Just Three Years but maximum amount that can be invested in bonds is limited to 50 lakhs.You can opt for this option with in 6 months from date of transfer of the land

Note :Agriculture land definition has been changed wef 01.04.2013 as under
(1) in an area within 2 kilometers of local limits of municipality etc., these 2 kilometers shall be measured aerially, and population of municipality etc. is more than 10,000 but not exceeding 1,00,000; or
(2) such land should not be situated within 6 kilometers of the municipality having population of more than 1,00,00 but not more than 10 lacs; or
(3) such land should not be situated within 8 kilometers if population of municipality etc. is more than 10 lacs.