I own agricultural land that is 35 years old. How can I determine its value for calculating capital gains tax?

I own agricultural land inherited from my father, which is more than 35 years old. If I sell this land, how will the capital gain be calculated, given that we do not know the land price from 35 years ago? What was the CII at that time, considering that the CII is available only from 2001 onwards to the current year?

Reply by Balwant Jain, a tax expert

Capital gains are taxable if an asset falls within the definition of capital assets. For the purpose of capital gains tax an agricultural land can be divided into two categories.

The first category includes the agricultural land which is generally referred to as rural agricultural land. Such land is situated beyond prescribed limits of municipal corporation limits depending on population of the municipality.

Such agricultural lands are not treated as capital assets and there is no tax liability in respect of profits earned on sale of such rural agricultural lands. In case your land falls under the category of rural land, there is no tax liability on sale or transfer of such agricultural land.

The second category of agricultural land, generally referred to as urban agricultural land is situated within prescribed distance from the municipal limits and is not excluded from the definition of capital asset. I feel your agricultural land falls under the second category.

An agricultural land becomes long term capital asset if it is sold after two years. Since it is inherited from your father, the period for which it was held by him is also included in your holding period and therefore it has already become a long-term capital asset.

As the land was acquired by your father prior to 1st April 2001, you can take the fair market value as on 1st April, 2001 as your cost. For fair market value as on that date you can obtain a valuation certificate from a registered valuer. Please note that the fair market value as per the valuer’s certificate cannot exceed the value derived from rates for payment of stamp duty for that period, popularly known as circle rate.

As far as rate at which tax on such long term capital gains has to be paid is concerned, you can either pay tax at 20% after applying cost inflation index to the fair market value on 1st April 2001 or pay tax at 12.50% on the actual difference between sale price and fair market value as on 1st April 2001.

In case you do not want to pay the taxes, you have three options to save: Invest in another agricultural land, invest in capital gains bonds or invest in a residential house within prescribed time period. 

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant his X handle.