Capital gains from sale of agricultural land may not be taxed

My wife got agricultural property of 5 acres in rural area as gift from her grandfather in 2004. This was sold in May 2016. How should this income from sale of rural agricultural land be shown in the income tax return (ITR)? 

—Krishna D.V.

Generally, sale of land would trigger taxes on the capital gains arising from the sale.

However, agricultural land can be excluded from taxation if specific parameters (such as: usage of the land for agriculture, distance from local limits of a municipality, and local population in the municipality) that are outlined in the Indian income tax laws (Section 2(14) of the Income Tax Act, 1961 (the Act)) are met. 

Analyse if all the specified parameters are satisfied. If they are, the land can be classified as ‘agricultural land’ and the gains arising from its sale will not be taxable in your wife's hands. The exempt gain will need to still be disclosed in her income tax return for the period ended 31 March 2017, in the Exempt Income (EI) schedule under “others”.

If the land did not qualify as agricultural land, and as your wife has held it for more than 24 months from the date acquired, the gains, if any, from the sale would be taxable as long-term capital gains (LTCG). This is computed as the difference between net sale proceeds and the indexed cost of acquisition of the land. Indexation refers to adjusting the cost of the asset based on the cost inflation index (CII) published by the income tax department for the financial year (FY) of purchase by her grandfather and FY of sale. The balance gain is subject to tax at 20.60% (plus applicable surcharge). 

Your wife can claim an exemption from such tax, under section 54F of the Income Tax Act, 1961, if the net sale proceeds are re-invested to buy or construct a residential house in India (called ‘new asset’ for ease of reference). This exemption does not apply if she already owns or invests in any other residential house (other than the new asset), within prescribed timelines. 

This re-investment should be made within the specified time frames (i.e. within 1 year before or 2 years after the sale date where the new asset is purchased or within 3 years from the sale date where the new asset is constructed). Net sale proceeds would mean the sale proceeds after reducing any costs incurred to sell the land (such as broker fees).

If the new house is not constructed by the due date of filing the return, your wife can temporarily park the gains in designated capital gain account scheme before filing the return to claim the exemption. If the amount is not utilized for 3 years or is used for any other purpose, the same would attract tax in the year of such use or in the third year.

Alternatively, your wife may invest the capital gains in specified bonds to claim exemption from LTCG tax to the extent of the amount invested or Rs50 lakh, whichever is less.

If the LTCG is taxable on account of the land not qualifying as agricultural land, the computation mechanism and the exemption on reinvestment would need to be appropriately disclosed in the schedules relating to capital gains in the income tax return form.

I invested Rs1 lakh in various stocks through intraday trading and made a profit of Rs45,000 in total. What will be my tax liability? 

—Nilesh Agarwal 

Your intra-day trading transactions are treated as speculative transactions and the net income earned, after deducting eligible expenses incurred to earn the profit, is taxed as business income. Appropriate documentation and books of accounts would need to be maintained to support the income and expense claims. 

You would need to pay taxes on such income at the rates applicable to your total income, for the financial year (FY) in which you earned this income. These taxes will need to be paid in advance during the year in four specified instalments on specified dates on the presumption that you are not a senior citizen. 

If you incurred any loss from speculative transactions in any of the four FYs preceding the FY in which you have earned this profit, and you had reported such a loss in your tax return, the profit can be offset against such loss.

I interned with a company for 4 months and got a stipend of Rs60,000 per month. Will this be taxable?

—Govind Bajpai 

If your total income, from all sources including the stipend, did not exceed Rs2.5 lakh during the relevant financial year, you would not have a liability to pay taxes on the stipend earned. Taxability of stipend will also need to be examined independently based on various factors like whether the internship is part of your curriculum, quantum, and other factors.  Further, even if you are not liable to pay taxes, your obligation to file a tax return may be determined based on various other factors like holding overseas assets.

Parizad Sirwalla is partner (tax), KPMG.

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