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Q. I am 75. I have ceased to be an I-T assessee for more than 10 years. I inherited agricultural land that I have held for 70 years. I want to sell it now. Please let me know on the exemptions available and tax liabilities on sale.

T.R. Vasudevan

A. Agricultural lands are of two types viz. rural and urban. Depending on the classification, the taxability of the sale of an agricultural land is determined.

If the land is situated in the following areas:

a) In an area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or (b) In any area within the distance, measured aerially— (i) Not being more than two km from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or (ii) Not being more than six km from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or (iii) Not being more than eight km from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh. The population is to be determined from the last census.” Then the same is rural agriculture land. Rural agricultural lands are not capital assets as per the Income Tax Act, 1961 and hence, are not taxable.

If the land is not situated in the aforementioned areas, then it is said to be urban agricultural land. Urban agricultural lands are capital assets and are taxable on transfer. Capital gains/loss for long term capital assets are to be determined in the following manner:

The first limb will consist of selling price less brokerage. Also, if the selling price is lesser than the guideline value, then the guideline value is to replace the selling price. Kindly check with the registrar’s office/website order to ascertain the guideline value of the undivided share. The second limb consists of purchase cost plus registration costs which is to be adjusted with inflation (indexation) in case of long term capital asset. This is to be done with the aid of the Cost Inflation Index (CII) released by the I-T department every assessment year. If you have incurred any cost of improvement, then the same can also be added along with the purchase cost (adjusted with CII if applicable). As you have been holding the land for the past 70 years, you may avail the market rates as on April 1, 2001 as the cost the acquisition and compute the Indexed Cost of Acquisition. The difference of the first and second limbs, if positive, is Long Term Capital Gain and if not, it is Long-Term Capital Loss. Long Term Capital Gains attract 20% tax plus applicable surcharge and cess.

Further, irrespective of the mode of receipt, the income is treated as capital gains. It is to be noted that any amount received equal to or more than ₹2,00,000 by way of cash will attract penalty for the full amount in your hands.

Q. My sister and I are liable to pay long term capital gains (LTCG) tax this year. To get full exemption from the tax, we understand that the whole sale proceeds could be invested in residential property. Can we invest the entire sale proceeds together in a single house property jointly and keep 50% of share in individual names? Once we invest, is there any lock-in period or other limitations for resale / redevelopment of the newly-acquired property in joint names? Do we have other better options to invest in and save on LTCG tax?

George Thomas

A. We assume you have sold a capital asset other than residential property. You, along with your sister, may invest in a single residential property and register the same in the same percentage of ownership as it was in the original capital asset that was sold / being sold. It is to be ensured that the amount of investment is equal to or higher than the Long Term Capital Gains arising from the transfer of the original capital asset. Conditions for availing the exemption under Section 54F of the Income Tax Act, 1961 are as follows and all the conditions are to be satisfied in order to claim the exemption:

a) The new residential property is to be purchased within two years from the date of transfer of the original capital asset or constructed within three years from the date of transfer of the original capital asset

b) Once invested in the new residential property, the same is not to be transferred within three years

c) You and your sister should not own more than one residential property, other than the new asset, on the date of transfer of the original asset

d) You and your sister should not purchase any residential property, other than the new asset, within a period of one year after the date of transfer of the original asset

e) You and your sister should not construct any residential property, other than the new asset, within a period of three years after the date of transfer of the original asset

You and your sister may, alternatively, invest in bonds under Section 54EC of the Income Tax Act, 1961, up to an amount of ₹50 lakh by each individual within six months from the date of transfer of the original asset in order to claim exemption.

(The adviser is Partner, GSS Associates, Chartered Accountants, Chennai)