What is the tax liability on sale of agricultural land?

How should I transact with the buyer, given that I want to deposit the entire amount in my bank and re-invest thereafter? However, the registry document will be based on the circle rate of the property, while the actual transaction will be done at the market rate, which is three times the circle rate. Since I am already in 30% tax slab, what will be the tax liability on this transaction?

—Toshi

Agricultural land in India does not qualify as a capital asset, unless it is situated:

Any area within the jurisdiction of a Municipality/Cantonment Board having a population of 10,000 or more; or any area (distance measured from the air) within 2 km of the local limit of any municipality/cantonment board with a population of more than 10,000 but not more than 100,000; or within 6 km of the local limit of any municipality/cantonment board with a population of more than 100,000 but less than 1 million; Or within 8 kms of the local limits of any municipality/cantonment board with a population of more than 10 lakhs.

For this purpose ‘population’ is defined as the number of persons as per the last preceding census of which the relevant figures have been published before the first day of the previous year.

If the land referred to in your question fulfills the above specifications, then such agricultural land in India would not qualify to be a capital asset and hence profit/loss from transfer of such land would not be taxable under the Income Tax Act.

However, if the land does not meet the above specifications, it will qualify as a capital asset and any profit or loss from transfer of such land will be subject to capital gains tax under section 45 of the Act.

Assuming the land is held for more than two years (including the holding period of the previous owner from whom it was inherited), the gain will be classified as long-term capital gain (LTCG).

For the purpose of computing LTCG, the cost and indexed cost of acquisition may be considered as per the applicable provisions. Further, the actual transaction value (i.e. market rate) being higher, should be considered as sale consideration for computing LTCG (and not the lower circle rate).

LTCG will be subject to a tax rate of 20% plus applicable surcharge and cess. Roll-over deduction under section 54B, 54F and 54EC of the Income Tax Act for reinvestment in specified assets can be assessed against LTCG subject to specified conditions.

With regard to the manner of receipt of money, please note that the provisions of section 269SS of the Act prohibit receipt of money in excess of any amount. 20,000 cash. Any transaction above this amount in respect of transfer of immovable property should be in non-cash mode (account payee cheque/account payee bank draft/using electronic clearing system through bank account/prescribed electronic mode).

Parijad Sirwala is Partner and Head, Global Mobility Services, Tax, KPMG in India.