Your Taxes

I am 64, with income less than ₹1 lakh. What will be tax liability on selling my 50-year-old inherited agricultural land? How can I save taxes?

H L Srivastava

The applicability of capital gains would depend on whether the agricultural land is situated in a rural area as notified in the tax laws. According to Section 2(14) of the Income Tax Act, 1961, an agricultural land situated in any area, which is not within the jurisdiction of or within 8 km from the local limits of any municipality, corporation or cantonment board or which does not have a population of more than 10,000 as on the first day of the previous year would not be considered a “capital asset”. Accordingly, sale of such agricultural land will not attract capital gains tax.

Once it is established that there would be a tax liability, the next step would be to determine the nature and quantum. If you have held the land for more than 36 months, it would qualify as a long-term capital asset. In this scenario, you can get the indexation benefit.

The cost of acquisition of an inherited land (as in your case) would be the cost at which the original owner has actually acquired the property, as increased by cost of improvement made subsequently, if any. However, since the property is 50 years old, you have the option of taking the actual cost of acquisition or fair market value as on April 1, 1981 and apply indexation on this.

Coming to the taxation part, if your total income after inclusion of the capital gains is less than the basic exemption limit applicable for senior citizens (currently ₹3 lakh), then there would be no tax liability for you. On the other hand, if this is higher than the limit, you would have to compute tax at 20 per cent on the differential capital gains.

To save taxes, you can utilise the entire sale proceeds for procuring a new agricultural land within two years from the date of sale of the old agricultural land, provided the old land has been put to use for agricultural purposes in the preceding two years. Or, you can purchase one residential property either a year before selling the land or two years after the date of sale or construct one residential property within three years from the date of transfer.

If you are unable to re-invest the net sale proceeds into a new house before filing the tax return for the year of sale, the unutilised balance of the proceeds is to be deposited into the Capital Gains Account Scheme (CGAS) before filing your tax return.

However, the amount deposited should be utilised for purchase of a new house within the specified deadlines, failing which, the amount would be taxable as long-term capital gains in the year in which the three-year tenure is exhausted.

Under 54EC, investment can be made in specified bonds up to ₹50 lakh within six months from the sale of the land, subject to fulfilment of specified conditions.

The above avenues have a lock-in period of three years. The exemption claimed would be withdrawn if the house is sold or the bonds are converted into cash within the lock-in period.

The writer is Partner, Deloitte, Haskins and Sells LLP. Send your queries to taxtalk@thehindu.co.in

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