I have inherited a piece of agricultural land that my father bought in 1990 for Rs 2 lakh. I want to sell it now at Rs 25 lakh. How much tax will I need to pay?

I have inherited a piece of agricultural land that my father had bought in 1990 for Rs 2 lakh. The land was transferred in my name in December 2020 after his death. I wish to sell it now. I want to know what the cost for me and what will long-term capital gains will be if I sell it for Rs 25 lakh? I am a senior citizen. 

Reply by Balwant Jain, a tax and investment expert 

If the agricultural land is situated in a rural area or outside the limits of a municipality, depending on the population of the municipality, it does not fall within the definition of capital asset as per section 2(14) of the Income Tax Act. So, the question of any capital gains on the sale of such an asset does not arise and, therefore, the profits made on the sale of this land will be fully tax-free. 

The tax implications for the sale of agricultural land depend on its status and location. Agricultural land situated in a rural area is not classified as a capital asset, hence the profit from its sale is exempt from income tax. In contrast, gains from the sale of urban agricultural land fall under the category of 'capital gains' and are subject to income tax.

Hence, the profits from urban agricultural land become taxable either as short-term or long-term depending on the holding period. If the holding period is more than two years it is long-term capital gain and if the holding period is less than two years it is short-term capital gain.

If the urban agricultural land is bought before 2001, one has the option to take the fair market value of this land on 1^st April 2001. So, one can find out the market value of the land on 1^st April 2001 with the help of a valuer and compute the indexed cost. The indexed cost reduced from the sale consideration will be taxable long-term capital gains on which one will have to tax at a flat 20%.  Exemption from payment of capital gains tax can also be availed by investing the money received for buying a residential house or another agricultural land subject to fulfilment of other conditions as well as by investing in capital gains bonds of specified financial institutions. 

(Views expressed by the investment expert are his/her own.)