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TAX RELIEFS ON AGRICULTURAL LAND

Important amendments under Capital Gains Tax & Wealth-tax provisions under the Finance Act 2013 

Section 2(14) of the Income-tax Act, which defines ‘capital asset,’ excludes from within its purview an agricultural land situated in India at a place having a population of less than 10,000 as per the last preceding census or at an area not comprised within any municipal limits or within a prescribed distance from such municipal limits.

      The Finance Act 2013 has, with effect from F.Y. 2013-14, revised the prescribed distance as being within a range of upto 2, 6 or 8 kms. (such distance being the aerial distance) from the municipal limit, based on the population as described hereunder:

  • Where population is more than 10,000 but not exceeding 1 lakh, 2 kms.
  • Where population is more than 1 lakh but not exceeding 10 lakhs, 6 kms.
  • Where population is more than 10 lakhs, 8 kms.

 If the agricultural land sold by a taxpayer does not qualify as a ‘capital asset’ on the basis of the above test, then it does not give rise to any taxable capital gains. Any agricultural land situated in any ‘urban area’ on the basis of the above guidelines being required to be treated as a ‘capital asset,’ any gains arising from the transfer of the same would be liable to tax as capital gains.

      A special exemption has been provided under Section 10(37) in respect of capital gains arising out of compensation or consideration received for any urban agricultural land on account of compulsory acquisition under law. This exemption is further subject to the condition that the land in question was used for agricultural purposes either by the individual or his parent or by his HUF during the period of 2 years immediately preceding the transfer.

      It needs to be noted, however, that even in such cases, while the amount of capital gains out of the award of compensation would be exempt, the compensation awarded in the form of interest would very much be taxable as ‘income from other sources’ in the hands of the taxpayer.

       Under Section 145A, interest received by a taxpayer on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.  However, under Section 57(iv), it has also been provided that a deduction of a sum equal to 50% shall be allowed in respect of such income treated as taxable in the year of receipt.

NO WEALTH TAX ON AGRICULTURAL LAND

     Section 2(ea) of the Wealth-tax Act defines ‘assets,’ which are liable to wealth tax. ‘Urban land’ has been classified as one of such asset. With effect from F.Y. 2013-14, the definition of urban land has been revised by the Finance Act, 2013. On the same lines of the definition of the term capital asset as referred to hereinabove, it has been provided that urban land would mean land situated in any area within the municipal limit and also within a range of upto 2, 6 or 8 kms from the municipal limit (such distance being the aerial distance), based on the population as prescribed hereunder: 

  • Where population is more than 10,000 but not exceeding 1 lakh, 2 kms.
  • Where population is more than 1 lakh but not exceeding 10 lakhs, 6 kms.
  • Where population is more than 10 lakhs, 8 kms.

    With a view to allay fears in regard to a possible interpretation that agricultural land situated in an urban area may be taxed as being in the nature of ‘urban land,’ at the time of the passing of the Finance Bill, 2013 in the Lok Sabha last week, the Finance Minister introduced an amendment to Section 2(ea) of the Wealth-tax Act, with retrospective effect from Assessment Year 1993-94, providing that “urban land would not include land classified as agricultural land in the records of the Government and used for agricultural purposes.”

Accordingly, it has been clarified under Section 2(ea) that urban land would not include the following:

  • Land classified as agricultural land in the records of the Government and used for agricultural purposes or land on which construction of building is not permissible under any law, e.g. ULC Act, Green Belt Regulations, etc.
  • Unused land held for industrial purpose upto a period of two years from the date of its acquisition.

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