With the growing importance of organic farming, many people consider investing in agricultural land. Moreover, agricultural land is widely seen as a lucrative investment option due to higher returns. Investors can expect capital appreciation and gain profit through the sale of agricultural land. Moreover, the investment comes with tax benefits as no capital gains tax is applicable. However, the exemption is only for rural agricultural land.
According to reports, around 60% of India’s land is under agriculture. Agricultural land holds great importance as agricultural activities contribute to the economy in a major way and generate employment. Â Agricultural land in India is classified into rural agricultural land and urban agricultural land.
In this article, we will study the legal aspects of buying rural agricultural land and the tax implications.
Difference between rural agricultural land vs urban agricultural landÂ
| Rural agricultural land | Urban agricultural land |
| Rural agricultural land is mainly utilised for farming activities in rural areas. | Urban agricultural land is used for farming activities in urban areas. |
| The land must be within the municipality’s jurisdiction to be classified as rural agricultural, along with a population below 10,000.
The land must be located outside the municipality and meet specific criteria. |
Any agricultural land in an area within the jurisdiction of a cantonment board or municipality with a population equal to or more than 10,000. |
| It is spread over a large area and used for cultivating crops, such as wheat, rice, pulse, and vegetables. | It is typically smaller in size than rural agricultural land. It comprises rooftop gardens, community gardens and small-scale organic farms within the city limits. |
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India is predominantly an agrarian economy. Agriculture is the backbone of India’s economy. Urban agriculture is gaining significance due to the growing demand for fresh produce in cities because of rapid urbanisation.
Location of rural agricultural landÂ
The land must be in rural areas, outside urban or industrial zones. This ensures the utilisation of land for agricultural purposes and not for commercial or residential development. Rural agricultural land located outside municipality limits should meet the following criteria:
- Over two km from the municipality limits with a population of over 10,000 but not exceeding 1,00,000.
- Over six km from the municipality limits with a population of over 1,00,000 but not exceeding 10,00,000.
- Over eight km from the municipality limits with a population of over 10,00,000.
Legal documentation for rural agricultural landÂ
Legal documentation, such as land ownership records, is required to ascertain if the land is rural agricultural. It is mandatory in property transactions, ensuring transparency, and authenticity.
Taxability of rural agricultural landÂ
Rural agricultural land in India is exempted from taxation. Agricultural income of individuals and Hindu Undivided Families (HUFs) is not taxable under the Income Tax Act 1961. However, the income from activities other than agricultural operations, such as rental income from farmhouses or income from selling produce in urban areas, may be subject to taxation.
If the total income of an individual or HUF exceeds the basic exemption limit, which is Rs 2.5 Lakh, they must file an income tax return. They must also declare agricultural income in the income tax return, even though it is exempted from taxation.
Taxability on agricultural land sale
In India, taxability on agricultural land sales depends on the nature of land and the purpose of holding the property. If one holds rural agricultural land, it is not considered as a capital asset. Thus, no capital gains or losses arise on the transfer or sale of rural agricultural land.
On the other hand, if one holds urban agricultural land, it qualifies as a capital asset and capital gains arise on the sale or transfer of land.
- The nature of capital gains, whether long-term or short-term, will depend on the holding period of the asset.
- If one holds land for more than two years, it is regarded a long-term capital gain and taxable at 20%.
- If the holding period is less than two years, the gain is considered as short-term capital gain and taxable at the slab rate.
According to a ruling by the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) in May 2023, the amount obtained from the sale of agricultural land cannot be considered under capital gains. The ITAT order also stated that even when not generating surplus from the agricultural operation, the land will still be agricultural land.
Income tax on sale of ancestral agricultural land
When planning to sell inherited land, one must pay capital gains tax on the amount earned. The tax amount will depend on the selling price or the stamp value, whichever is higher. The cost of acquisition will be calculated based on the original purchase price or the fair market value of land in 2001, whichever is higher.
The difference between the selling price and the indexed cost will be considered as the long-term capital gain and the tax rate of 20% will be applicable.
The indexed cost of acquisition can be computed by multiplying the cost of acquisition with the cost-inflation index for the year of sale. For example, if the land is sold in 2023, use the cost-inflation index for this year to calculate the indexed cost of acquisition.
Legal requirements for buying rural agricultural land in India
There are specific regulations related to the purchase of rural agricultural land in India, aimed to protect the interest of farmers. This also contributes to sustainable farming practices. The legal procedures for buying rural agricultural land may vary from state-to-state. In some states such as Tamil Nadu, anyone can buy agricultural land irrespective of their profession while only agriculturists can buy agricultural land in other states. States such as Gujarat, Maharashtra and Karnataka may have restrictions on the purchase of agricultural land.
Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), Overseas Citizens of India (OCIs) cannot purchase agricultural land in India, according to the Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2015. However, they can own agricultural land through inheritance.
Moreover, land conversion is not permitted for agricultural land. That is, one cannot buy an agricultural land and convert the land for residential use unless the land is dry or barren.
How to buy an agricultural land?
- Undertake measurement of the agricultural land. The total area of the land and the boundaries marked by a surveyor are measured. The surveyor will compare the measured size with the title certificate. This is important as one must pay for the right plot area.
- Go through documentation: Verify the authenticity and legality of documents, such as title deed and release certificate, property tax receipts, sale deed, agreement of sale, etc. You can approach a legal professional to complete this process.
- Pay stamp duty and registration charges: Determine the final sale price of the land. Visit the sub-registrar’s office and complete the registration process. Pay the relevant stamp duty and registration charges.
Documents required to buy rural agricultural land in IndiaÂ
- 7/12 extract
- 8A extract
- 6/12 extract
- Registration or conveyance deed
- Land revenue tax receipt
- Title deed
- Encumbrance certificate
- Village map
- Soil testing report
TDS on sale of agricultural land
TDS stands for Tax Deduction at Source and is applicable on various types of incomes. In this TDS system, an individual is required to deduct a certain percentage of the payment as tax and deposit it with the government. TDS rates vary based on the nature of income and the status of the recipient. For example, the TDS rate on salary income is different from the TDS rate on interest income.
In rural areas, sale or transfer of agricultural land is exempted from income tax. Individuals must deduct TDS of 1% on the sale/purchase of a property if the transaction value is over Rs 50,00,000. The TDS rates specified under section 194IA are not applicable for sale/purchase even if the value exceeds Rs 50 Lakhs.
FAQs
What is rural agricultural land?
Rural agricultural land is utilised for farming and agricultural activities.
What are the benefits of investing in rural agricultural land?
Investment in rural agricultural land provides opportunities for agricultural business growth and offers tax benefits. No capital gains tax applies on the sale of rural agricultural land as it is not considered as a capital asset.
How to find rural agricultural land for sale?
Rural agricultural land for sale can be searched through real estate agents dealing in agricultural properties or through online property listings.
Who can buy rural agricultural land?
The criteria for buying rural agricultural land vary from state-to-state. Further, NRIs, PIOs and OCIs cannot buy agricultural land in India, according to the Foreign Exchange Management (acquisition and transfer of immovable property outside India) Regulations, 2015.
Can you get a loan to buy agricultural land in India?
Most banks and financial institutions offer loans for purchasing agricultural land in India.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
