Income Tax News: Demystifying Agricultural Income Tax, What You Need to Know

Income Tax News: The widespread perception is that income from farming is exempt from income tax. In addition, a lot of individuals think that revenue from the sale of agricultural land is exempt from income tax. It is false to think that way. Today, we're going to explain to you when income tax is due on farmland, or agricultural land, and when it isn't.

Understanding Agricultural Land Categories

Initially, be aware that there are two categories of agricultural land. Agricultural land is another name for farm land. Agricultural land in rural areas falls under the first type; likewise, agricultural land in urban areas falls under the second. Many of the areas that make up cities also have farms, and people farm there, but they are not classified as agricultural land for income tax purposes.

Criteria for Exclusion from Agricultural Land Status

Section 2 (14) of the Income Tax Act provides clarification on which lands are classified as agricultural land. According to income tax law, your agricultural land is not considered agricultural land if it is located within a municipality, Notified Area Committee, Town Area Committee, or Cantonment Board and has a population of 10,000 or more.

Land falling within a 2-kilometer radius that is inhabited by more than 10,000 people but not more than 1 lakh people is not considered agricultural land in a municipality or cantonment board. A municipality or cantonment board's surrounding six km are not considered agricultural land if its population is more than one lakh but not more than ten lakh. Likewise, land within an 8-kilometer radius of a municipality or cantonment having a population of more than 10 lakh will not be classified as agricultural land.

Inclusive Classification of Agricultural Land

Your agricultural land shall be regarded as agricultural land for the purposes of the Income Tax Law if it does not fall under the previously specified categories. Income tax law does not classify agricultural land as a capital asset.

In this case, the proceeds from its sale will not be subject to capital gains tax. On the other hand, your agricultural land will be valued as a capital asset if it is located within the previously specified ranges. They are referred to as urban agricultural land, and the proceeds from their sale will be subject to capital gains tax.

Short-Term Capital Gains Tax on Early Sale

The profit on the sale of the urban agricultural land will be regarded as a long-term capital gain if the land is held for 24 months. This will be subject to a 20 percent tax with indexation advantage. If the asset is sold within a year, there will be a short-term capital gains tax applied to the profit. According to your tax slab, the amount of the capital gain will be taxed.

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