Agricultural Land in Certain Areas is Not Capital Asset..!

by Ms. Parizad Sirwalla, Partner (Tax), KPMG

For capital gain purposes, an agricultural land situated in specified areas is not considered as capital asset. If you are planning to sell such land, there will not be any capital gain tax implications on sale.

In other cases, depending on the period of holding, there would be tax implications on sale of agricultural land. We have assumed that the said agricultural land is not situated in a specified area and therefore, the gains, if any, resulting from sale of land shall be taxable.

You may confirm the specified area as referred in section 2(1A) of the Income tax Act, 1961. In case of inheritance, the period of holding of house shall be reckoned from the acquisition date of land by the owner who has actually acquired the said land other than by inheritance, gift, and so on.

 

Parizad Sirwalla,
Partner (Tax), KPMG

As the land has been held for more than 36 months from acquisition date, the same shall be termed as long-term capital asset. If the net sale proceeds exceeds the cost of acquisition, then resulting gains shall be taxable as long-term capital gains (LTCG) in your and your daughters’ hands in the respective proportion of the share.

The cost of acquisition shall be the cost at which the previous owner, who has actually acquired the house other than by inheritance, gift, and so on, bought it.

Further, since the land had been acquired prior to 1 April 1981, you have an option of taking the actual cost of acquisition or fair market value (FMV) of the property as on 1 April 1981.

Accordingly, while calculating the LTCG, the cost of acquisition shall be the price at which the original owner had acquired the house or FMV as on 1 April 1981, according to your choice.

The cost of acquisition will have to be indexed by multiplying the original cost of acquisition or FMV if any, by the notified Cost Inflation Index (CII) for the year of sale and dividing by the CII of the year of purchase of the house by the original owner or during the financial year (FY) 1981-82 if FMV has been considered.

The cost of improvement, if any, has to be indexed as well. With respect to the portion (proportionate to your share in the inherited land) of LTCG taxable in your hands, an exemption from LTCG tax can be claimed by re-investing the net sale proceeds in one residential house located in India as per section 54F, subject to specified conditions. The aforesaid investment must be made within the specified time frames (that is, within one year prior to sale date or two years from the sale date or within three years for an under-construction property).

One of the specified condition categorically requires that while claiming LTCG exemption, you should not own more than one house (other than the new house), on the date of sale of the old land. For your share of LTCG, you can claim an exemption in the ratio of your share of net sale proceeds resulting from sale of old land re-invested into new house. Where the cost of new house exceeds proportionate net sale proceeds resulting from sale of old plot, entire LTCG should be exempt from tax.

However, where the cost of new house is lower than the proportionate net sale proceeds, LTCG is exempt from tax in proportion of cost of new house to the net sale proceeds.

Accordingly, the balance LTCG shall be taxed at 20.6% (inclusive of education cess). Additionally, if total taxable income during FY2014-15 exceeds Rs.1 crore, surcharge at 10% on basic rate (i.e. 20%) should be applied. If you are unable to re-invest the net sale proceeds into new house before filing the tax return for the FY of sale of house, then said unutilized balance sale proceeds should be deposited into the Capital Gains Account Scheme (CGAS) before the due date of filing the personal tax return.

The amount deposited into the CGAS should be utilized for purchase of a new house within aforesaid deadlines. If you are unable to utilize the amount deposited into CGAS within the aforesaid timeframe, then the unutilized amounts shall be taxable as LTCG in the FY in which three years from sale of old land has lapsed. If your total income for the FY as reduced by said LTCG is below the basic income exemption threshold for the said FY, then such LTCG shall be reduced by the amount by which the total income so reduced falls short of the basic income exemption limit.

The balance LTCG shall be taxed at flat rate of 20.6%. Alternatively, you can invest LTCG in specified bonds issued by the National Highways Authority of India or Rural Electric Corp. Ltd under section 54EC. The investment should be made within six months from sale date of old land subject to threshold of Rs.50 lakh and fulfilment of specified conditions. Please note that the investment in new house or specified bonds has a lock in period of three years.

Accordingly, if the new house is sold or the bonds are converted into cash within a period of three years, the exemption claimed from LTCG in respect of old land shall be revoked. If you take any loan or advance against the security of the said bonds, the same shall be deemed to be converted into cash. It would be advisable to consult a lawyer for documentation.

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