Agricultural land outside specified limits not treated as capital property for taxation

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I bought agricultural land in Rajasthan in September 2015 and the deed of purchase was notarized. I want to sell it now. If I sell it by notarial deed, will I be exempt from capital gains tax by investing in another property? Or is the registered deed of sale necessary to claim capital gains tax?

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It should be noted that agricultural land located outside the specified area limits is not treated as fixed assets and therefore capital gains tax is not applicable on the sale of such land. Certain specified farmland is considered capital property and only the sale of such farmland would be subject to capital gains. If this agricultural land was held for more than 24 months before the sale, the gains would be taxable as long-term capital gains (LTCG). LTCG is calculated as the difference between the net selling price (actual selling price minus brokerage fees) and the indexed acquisition and improvement cost.

In addition, exemption from the LTCG on the sale of agricultural land can be claimed under Section 54F of the Income Tax Act 1961, by reinvesting the net consideration for the sale, in a new home. dwelling located in India, in the previous year or within 2 years after the date of transfer of the agricultural land (if the new house is purchased) or within 3 years (if the new house is built), subject to the satisfaction of other specified conditions. If the cost of the new residential home is more than the net consideration for the sale, then all of the LTCG will be exempt. Otherwise, the LTCG will be exempt in the same proportion as the cost of the new residential home to the net sale consideration.

In addition, an exemption from the LTCG on the sale of agricultural land can be requested under section 54B of the law, by reinvesting the capital gains in another agricultural land, within 2 years from the date transfer of agricultural land, subject to the satisfaction of other specified conditions. If the cost of the new agricultural land is greater than the capital gains, then the entire LTCG is exempt. Otherwise, LTCG will be exempt up to the cost of the new agricultural land.

In addition, an exemption may be claimed under Article 54EC by investing the capital gains in notified securities subject to the satisfaction of other specified conditions.

As a general rule, the sale of immovable property can be effected by a registered deed of sale accompanied by payment of the applicable stamp duty, depending on the state in which the property is located. However, you should seek legal advice on the proper documentation and the stamp duty implications for the same. From an income tax point of view, the tax liability of the sale of agricultural land would not depend solely on whether the sale was effected by notarial deed or by registered deed. The whole transaction and the facts of the case should be reviewed and examined.

Parizad Sirwalla is Partner and Head, Global Mobility Services, Tax, KPMG India. Queries and views at [email protected]

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