How to claim exemption on long-term capital gain on sale of an agricultural land
Premium- You have to purchase another agricultural land within two years from the date of such sale transfer
I have received a compensation of around 1 Crore for land acquired by the Government of Gujrat. The necessary documents were executed on 30th June 2021. The land is my ancestral property. This was used by me for agriculture. I am planning to buy another agricultural land within a period of two years. Whether can I claim any tax exemption if I buy new agricultural land by 31st December 2022 and the amount of money required to be invested for claiming such exemption.
First you have to ascertain whether the land sold by you is an agricultural land within the meaning of definition of Income Tax Act. This you need to get examined by a Chartered Accountant based on the facts about the location of the land and population of the area where this is located. In case the land sold falls within the definition of agricultural land you do not have any income tax liability for such acquisition by the government. Even in case the land sold by you does not fall within the definition of agricultural land, you still have avenues to save your long term capital gain tax. Section 54B of the Income Tax Act provides for exemption for long term capital gains on sale of land used for agricultural purpose which does not fall within the definition of agricultural land. In respect of any long-term capital gains arising on sale of land which was used for agricultural purpose during the last two years either by you or your parents, you can claim exemption if you invest the capital gains for purchases of another land to be used for agriculture. You have to purchase another agricultural land within two years from the date of such sale transfer. Since the land sold by you is your ancestral property so in all probability you would not know about the cost of this land.
You have an option to take the fair market value of this land as on 1st April 2001 as your cost for the purpose of computation of capital gains. You can apply the cost inflation index to the fair market value as on 1st April 2001 and calculate your long term capital gains by reducing such indexed cost from the compensation received. Please note in case you are not able to purchase the new land for agricultural use before the due date of filing of your return next year i.e. 31st July 2022, you have to deposit the amount of indexed capital gains in a bank account to be opened under the Capital Gains Account scheme to be opened with a bank. You can use the money in this account for the purpose of purchasing the land for agricultural purpose.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail and @jainbalwant on Twitter
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